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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
Cafeteria plan excludes health insurance from wages
Tax Talk

COBRA reimbursements not taxable

Dear Tax Talk:
If a former employer reimburses an individual's COBRA (Consolidated Omnibus Budget Reconciliation Act of 1986) payments, is the COBRA payment received taxable to the individual?
-- Carol

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Dear Carol,
Generally an employer does not have to include in an employee's wages amounts paid by the employer for accident and health insurance. An employer can establish a cafeteria plan to exclude from an employee's wages amounts deducted from their paycheck for insurance.

A cafeteria plan, including a flexible spending arrangement, is a written plan that allows your employees to choose between receiving cash or taxable benefits instead of certain qualified benefits for which the law provides an exclusion from wages. If an employee chooses to receive a qualified benefit under the plan, the fact that the employee could have received cash or a taxable benefit instead will not make the qualified benefit taxable.

Page six of IRS Publication 15-B provides: "The exclusion for accident and health benefits applies to amounts you pay to maintain medical coverage for a former employee under the Combined Omnibus Budget Reconciliation Act of 1986 (COBRA). The exclusion applies regardless of the length of employment, whether you directly pay the premiums or reimburse the former employee for premiums paid, and whether the employee's separation is permanent or temporary."

Hence your COBRA payments are tax-free.

Bankrate.com's corrections policy -- Posted: Sept. 19, 2007
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