IRS Guidelines for Reimbursements
Medical expenses incurred before a self-insured reimbursement plan is officially established cannot be reimbursed tax-free—they must be counted as taxable income.
EMPLOYEE BENEFITSGOVERNMENTREIMBURSEMENTS
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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.
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SIMRP Health & Wellness is an independent entity that provide access to educational information regarding programs utilizing federally recognized tax codes and wellness reimbursement structures that may help qualifying organizations obtain benefits through payroll tax savings. We utilize the professional services of third-party providers for the preparation, filing, and implementation of SIMRP plan documents; however, we are not owned by, affiliated with, endorsed by, or acting on behalf of such providers, the Internal Revenue Service, the U.S. Department of Labor, or the federal government. The information provided on this website is for general educational and informational purposes only and should not be construed as tax, legal, accounting, financial, or regulatory advice. We are not tax professionals, attorneys, certified public accountants, or experts in the interpretation of tax law, and we do not recommend tax strategies or make guarantees regarding tax treatment, eligibility, savings, or compliance outcomes. Individuals and organizations seeking to verify or rely upon any information presented on this website should consult with qualified tax professionals, legal counsel, payroll specialists, or other licensed advisors regarding their specific circumstances before making any financial, tax-related, legal, or benefits decisions.
