IRS Guidelines for Reimbursements

IRS Guidelines for Reimbursements Under a Self-Insured Medical Expense Plan

Can an employee exclude reimbursements from taxable income if those medical expenses were incurred before their employer officially set up a self-insured medical reimbursement plan?

The Situation

Employer X sets up a self-insured medical reimbursement plan on December 1. The plan says it’s “effective” retroactively from January 1 of the same year. Employee A joins the plan on December 1 but had medical expenses earlier in the year, before the plan actually existed. Employee A submits those earlier expenses, and the employer reimburses them.

The Law

Generally, all income is taxable unless there’s a specific exception. Section 105 of the IRS Code says medical reimbursements are not taxable if:

• They’re paid under a valid accident or health plan, and

• They reimburse the employee, spouse, or dependents for actual medical care.

But here’s the key: the plan must already be in place at the time the expenses were incurred.

Court & IRS Findings

Past IRS rulings and court cases (like American Family Mutual Insurance Co. v. U.S. and Wollenberg v. U.S.) have made it clear:

• A plan cannot be made “retroactive” to cover expenses from before it was created.

• Reimbursing expenses incurred before the plan existed makes those payments taxable income.

The Ruling

Reimbursements for medical expenses incurred before the plan was established are not excludable under Section 105(b). In other words, the employee has to count those reimbursements as taxable income.

Plain takeaway: You can’t set up a medical reimbursement plan today and use it to cover medical expenses from earlier in the year. Only expenses incurred after the plan officially starts qualify for tax-free treatment.

This article is based on an article published on taxnotes.com, you can view the article and its author information HERE.