Dear Tax Talk,
I own a small company with only a couple of employees. We have a health insurance plan that repays employees’ health insurance premiums for plans they obtain. Thus it is a deductible business expense.

One of my employees is a retiree who continues to receive health insurance through his former employer — but he must pay monthly after-tax premium contributions for this coverage. My question is: Can my company repay him and deduct the expense for these premium contributions to his former company’s plan?
— Mark

Dear Mark,
You say your employee is a retiree? But if he is an employee of yours, then how is he retired? Let’s just say he’s an employee and he gets his health coverage from a former employer. Presumably it is either cheaper or better that he does this rather than go on your plan.

Well, it is pretty clear that if he were on your health plan, the premiums that you as his employer pay would not be considered wages to him. But in that case you would be paying the insurance provider directly. In this case, however, you’d be giving the employee a payment directly. If a payment is made to an employee, the employer has to determine if it is a qualified fringe benefit exempt from taxes. Otherwise employment taxes are due.

Under Internal Revenue Code Section 105, payments to an employee to reimburse for otherwise deductible medical care expenses, including insurance, are excludable from wages. Reimbursements have to be made under an accountable expense plan. This means that the employee needs to provide to you sufficient evidence to justify the reimbursement. For example, a copy of the insurance bill would be sufficient evidence.

Such payments for insurance premiums would be deductible by the employer.

Ask the adviser

To ask a question on Tax Talk, go to the “Ask the Experts” page and select “Taxes” as the topic. Read more Tax Talk columns.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

Bankrate’s content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate’s Terms of Use.