The End of Uncomplicated Health Insurance Coverage for Employees

Before 1/1/2014, small businesses had tremendous flexibility in how they compensated their employees with health insurance coverage.  Most small businesses didn’t want to establish a group health insurance plan and so would reimburse some or all employees for the employee’s individual health insurance premiums.

Various provisions of the tax code allowed small businesses to 1.) pick and choose which employees they wanted to compensate in this manner (i.e., discriminate), and 2.)reimburse the employee for their health insurance premiums on a pre-tax basis (i.e., the employer could give the employee money and the employee wouldn’t be taxed on it).

An IRS Notice issued at the end of 2013 put an end to this.  The discrimination rules have tightened up and you can no longer reimburse employees for their individual health insurance premiums on a pre-tax basis.

Starting 1/1/2014, the only way for an employer to help pay for some of the employee’s health insurance premiums in a manner that doesn’t create taxable compensation to the employee is to establish a group health insurance plan under the employer and then pay for some or all of the employee’s group health insurance premiums.

Creative Gifting

Gifting allows flexibility to shift income or deductions between individuals.  I will briefly mention 2 gifting strategies:

  • Presume that you are don’t have enough itemized deductions to itemize, and are in a low tax bracket.  If you want to make a donation to a charity but can’t benefit from the deduction, then gift the funds to a friend who can benefit from the deduction.  The friend can make the donation to the charity and utilize the deduction.  In order for the gift to be legitimate, you can have no control over the money once you make the gift to your friend.  If the friend decides not to donate it, there’s nothing you can do – except leave that friend off of your Christmas card list.
  • Presume that you want to gift money to your child to use as a down-payment on their house.  Instead of gifting cash, you can gift appreciated securities to your child.  The child will sell the appreciated securities and be taxed on the gain at their lower tax bracket.  As the stock market continues to heat up, this may be a timely strategy to get some gains off of your plate.