The means by which individuals acquire health insurance coverage for themselves and their families are much in the news, as the rules mandated by the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 come closer to full implementation. Health coverage provided under employer-funded arrangements seems likely to remain a significant portion of our health care system for years to come, and evolving tax rules encourage employers to pay or reimburse employees for certain health care expenses.
In some circumstances the existence of a “plan” is an essential element of achieving the desired tax treatment for an employer’s payment of health care costs.1 A recent decision of the U.S. Court of Appeals for the Eighth Circuit underscored the importance of having medical insurance coverage provided to employees pursuant to an “accident or health plan” adopted by the employer, and held that health insurance premiums paid by the corporation on behalf of its principal employee and sole shareholder, but not pursuant to an accident or health insurance plan of the employer, (i) were not deductible by the corporation, but (ii) were includible in the employee’s taxable income. As a result of this decision, an apparently aggressive effort to claim costs unrelated to the principal revenue-producing activity of a corporation as business deductions backfired in several respects.
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