Taxable compensation or medical reimbursement?

• Author: Kautter, David J.
• Position: Brief Article

The Service has ruled in Letter Ruling 9522030 that an employer's payment of a yearly bonus to all employees in the amount of their health insurance deductible is taxable compensation rather than an excludible medical reimbursement.

As a result of a collective bargaining agreement, an employer-sponsored full-reimbursement health care plan was changed to include a $1,000 per family deductible. However, at the beginning of each plan year, employees received a cash "Health Care Bonus" equal to this amount. The employer requested guidance from the IRS on the applicability of FICA and FUTA taxes to the bonuses.

The Service found that the health care bonus was not a reimbursement because it was not paid as the result of any ailment or injury (Regs. Sec. 1.105-2). Furthermore, all...