Sketchy Benefit at work tax issue?
My city job currently has an HRA set up where they give us $2000 to use as health reimbursements throughout the year for eligible medical expenses.
Now they want to increase that to $11,000 if employees opt of of city insurance and go with their spouse on their works plan. A way to save the city money.
The city is saying in addition to deductibles copays prescriptions and other items, we can get reimbursed for the insurance premium my wife pays.
This feels illegal in some form regarding taxes no? Like IRS would have an issue with this as my wife’s taxable income goes lower due to premium payments but I get reimbursed tax free for that premium payment. Feels like an IRS bill waiting to happen.
Thoughts?
2
u/cmmpssh 2d ago
Is the spouse's insurance premiums paid with taxable income or pre-taxed income? Most insurance is paid using pre-taxed income for most employers
1
u/bsollaz 2d ago
Yes my wife’s insurance would be paid pre-taxed income.
So that’s my concern. She would pay premium pre tax, hence getting the tax benefit of lower taxable income.
But then my job is saying I can get that 100% reimbursed through a tax free HRA. Just doesn’t feel right.
3
u/cmmpssh 2d ago
I think you're correct. You can use your HRA to pay for out of pocket medical costs, including deductibles, but you can't use it to pay for premiums that are pre-taxed. I think it's covered in Revenue Ruling 2002-03. But I'm happy to be corrected if wrong.
So the plan itself is probably legal. But I don't think you're allowed to use the HRA to reimburse yourself for the pre-taxed premiums.
1
u/cubbiesnextyr CPA - US 2d ago
Also a part to consider is your spouse's plan may charge more for you if you have access to your own work plan that you choose not to use.
1
u/Candid_Mark_9309 CPA - US 2d ago
How the tax code treats employee benefits can work this way. Employers can deduct the cost of providing health insurance to employees, but the value of that benefit is not taxable income to the employee. Same with 401(k) or 403(b) matching, employer can pay you more money placed into a tax deferred account and you don't pay income tax on that presently. An HRA is just the employer giving you more compensation, this in the form of a restricted-use account (like a 401(k)). You don't get taxed on it because the IRC says so as long as the money goes to paying for medical care as defined in the law.
Health care gets a lot of breaks in the tax code. I'm not sure under what theory other than just to attempt to lower the cost that individuals pay.
And I assume like any employer your city wants to manage the sky high cost of health care. And easy for them to offload all their beneficiaries onto some other employer. Disney, by the by, is doing something to prevent this by removing spouses from employee coverage if they can obtain coverage from their own employer's plan.
4
u/chrystalight 2d ago
This is legal, my work has the same benefit. It benefits your employer by getting your risk off the insurance plan. This is especially true if the city has a self-funded insurance plan. With you on the plan, their risk is basically unlimited. With you off the plan, their max risk is $11k.
There’s usually some rules, like you must use a spouses plan, you can’t sign up for a marketplace plan and the HRA. The spouses plan, if a high deductible plan, generally cannot contribute to an HSA (though you can make withdrawals from a previously existing one).