Question:
Is it legal to use a Section 125 cafeteria plan or Health Reimbursement Arrangement (HRA) to pay the monthly "premiums" ("share payments") of a health care sharing ministry?
Answer:
First, let's discuss what a cafeteria plan is... Generally, the terms "Section 125 plans" and "cafeteria plans" are synonymous. According to a page on the IRS website, a cafeteria plan is a separate written plan maintained by an employer for employees that meets the specific requirements of and regulations of Section 125 of the Internal Revenue Code. It provides participants an opportunity to receive certain benefits on a pretax basis. Participants in a cafeteria plan must be permitted to choose among at least one taxable benefit (such as cash) and one qualified benefit.
Second, let's discuss what an HRA is... An HRA is a tax-advantaged benefit that allows both employees and employers to save on the cost of healthcare. HRA plans are employer-funded medical reimbursement plans. The employer sets aside a specific amount of pre-tax dollars for employees to pay for health care expenses on an annual basis. One should ask his or her tax professional about the regulations concerning HRAs.
Now, let's answer the question... HRAs or Section 125 cafeteria plan benefits cannot be used to reimburse individuals for share payments because they are not medical expenses as defined under Section 213; however, they can be used to pay medical expenses paid directly by the taxpayer, such as co-pays, prescriptions, and preventative care as permitted by Section 213.
As a reminder, however, the Affordable Care Act has changed the requirements when reimbursements are allowed under a Section 125 plan or with an HRA. The ACA market reforms affect every employer having two or more participating employees in employer-sponsored health plans. DOL FAQs published on November 6, 2014 and IRS Notice 2013-54 provide details of ACA requirements. Individuals should contact their tax professional for guidance on this matter.
One interesting state tax issue: According to the American Legislative Exchange Council, "In 2007, Missouri became the first state to amend its income tax code to allow a full personal deduction of health care sharing ministry expenses."
Is it legal to use a Section 125 cafeteria plan or Health Reimbursement Arrangement (HRA) to pay the monthly "premiums" ("share payments") of a health care sharing ministry?
Answer:
First, let's discuss what a cafeteria plan is... Generally, the terms "Section 125 plans" and "cafeteria plans" are synonymous. According to a page on the IRS website, a cafeteria plan is a separate written plan maintained by an employer for employees that meets the specific requirements of and regulations of Section 125 of the Internal Revenue Code. It provides participants an opportunity to receive certain benefits on a pretax basis. Participants in a cafeteria plan must be permitted to choose among at least one taxable benefit (such as cash) and one qualified benefit.
Second, let's discuss what an HRA is... An HRA is a tax-advantaged benefit that allows both employees and employers to save on the cost of healthcare. HRA plans are employer-funded medical reimbursement plans. The employer sets aside a specific amount of pre-tax dollars for employees to pay for health care expenses on an annual basis. One should ask his or her tax professional about the regulations concerning HRAs.
Now, let's answer the question... HRAs or Section 125 cafeteria plan benefits cannot be used to reimburse individuals for share payments because they are not medical expenses as defined under Section 213; however, they can be used to pay medical expenses paid directly by the taxpayer, such as co-pays, prescriptions, and preventative care as permitted by Section 213.
As a reminder, however, the Affordable Care Act has changed the requirements when reimbursements are allowed under a Section 125 plan or with an HRA. The ACA market reforms affect every employer having two or more participating employees in employer-sponsored health plans. DOL FAQs published on November 6, 2014 and IRS Notice 2013-54 provide details of ACA requirements. Individuals should contact their tax professional for guidance on this matter.
One interesting state tax issue: According to the American Legislative Exchange Council, "In 2007, Missouri became the first state to amend its income tax code to allow a full personal deduction of health care sharing ministry expenses."
If a church pays for its employees' "premiums" in healthcare sharing ministries, is that payment included as a "health plan" under Internal Revenue Code section 106, or are those payments reportable W2 wages?
ReplyDeleteI left a previous comment on this, but I've found my answer. It appears that HRAs are no longer permissible, absent being combined with a group health plan that complies with the ACA, per IRS Notice 2013-54. Notice 2013-54 appears to conflict with what is stated in Publication 15-B, though, concerning reimbursement of medical expenses.
ReplyDeleteYes, good point Jason. We added a clarifying paragraph (second to last) to this post. All medical benefits should be compatible with ACA requirements.
ReplyDeleteHealth care sharing “premiums” are not medical expenses.
Hi,
ReplyDeleteSo I understand the monthly shares are not tax deductible. I'm wondering then if all Medical Expenses are deductible even if reimbursed? My logic is that since the monthly shares of those paying my medical expenses are not tax deductible for them, then their reimbursement of my medical expenses should be treated as a gift to me (subject to the $14,000 limit) and I can write off the medical expenses even those I was reimbursed for up to the $14,000 gift limit. I can't find any guidance for this online. What do you think?
Great question, Anonymous. The $14,000 gift limit is not applicable to this situation.
ReplyDeleteBut are medical expenses deductible on Schedule A even if reimbursed by participants in the health-care sharing plan? Well... that sounds like a great topic for a future blog post... sometime after April 18!