CASE STUDY #1 MEMO

TO: Taxpayer

FROM:

DATE: 13 September 2013

RE: Tax treatment of employer-funded health insurance premiums

I. FACTS

The taxpayer was laid off from ABC Corporation after 15 years of employment. ABC has a health insurance program that provides coverage to all employees, including those who have been laid off or retired within the last two years. ABC continues to pay all health insurance premiums on behalf of the taxpayer even while he is not working.

II. ISSUE(S)

A. Is the taxpayer required to include the employer-funded health insurance premiums in gross income?

III. SHORT ANSWER

No. The taxpayer is considered an employee and continues to participate in an employer-funded health plan. The taxpayer is not required to include employer-funded health insurance premiums in gross income.

IV. ANALYSIS

A. Framework of Authorities

1. Statutory Authority

IRC § 106(a) generally allows an employee to exclude employer-provided coverage under a health plan from gross income.

2. Treasury Regulations

An employee’s gross income does not include employer contributions to a health plan that provides compensation in the event of personal injury or sickness incurred by the employee or the employee’s spouse and dependents. Treas. Reg. § 1.106-1.

3. Treasury Publications (or IRS Position)

In Rev. Rul. 82-196, 1982-2 C.B. 53, an employer contributes to a health plan on behalf of its employee. Under this health plan, the employee is covered before and after retirement. The Service cross-references Rev. Rul. 62-199, 1962-2 C.B. 32 in its determination that the employer’s contributions to a health plan that provides coverage to an employee, before and after retirement, are excludable from the employee’s gross income under IRC § 106(a).

In Rev. Rul. 85-121, 1985-2 C.B. 56, the taxpayer