Taxation of self funded medical premiums and benefits paid to 503(c) h

[Guest Mary Anna T. McCoy, CEBS]

I have a new client who is a not for profit community, non-federal governmental, hospital district in South Lousiana. Some years ago the uncompensated board members voted to include themselves as a separate, non-contributory class under the hospital's self funded medical plan. They have no waiting period, as do some of the other classes of employees, and they costs are paid in full by the hospital, while the employee's is contributory.

What is the taxation of the premiums paid by the hospital on their behalf and of the dollars paid to their families in benefits?

This structure of the classes appears not to meet the non-discrimination guidelines. From my understanding the coverage the board, exercising their discretion over the plan, put in place could be reportable as ordinary income to them and not only premiums but all the benefits received taxable.

What has been your experience in similar situations and if there is a better way for the hospital to structure benefits they would like to provide for their board members. I have advised the hospital administration to seek the advise of a tax attorney.

[mbozek]

What do u mean by self funded? Section 105(h)? VEBA? As a general rule premiums for health insurnace for sefl employed persons is included as gross income and they employee deducts 70% of the premiums as an above the line deduction. However I am not sure that there are premiums paid in a self funded plan. I dont have any prior experience in this situation because no client would ever crate the tax problem you have identified. Yes the benefits may be taxable. Have you asked the accountants for the Hospital how they have been treating the benefits for tax purposes? Best way to eliminate the problem is for the hospital to purchase a health insurance contract for the board members and then include the premium cost as self employment income on a 1099 wqhich can be deducted by the board members on their tax returns.

[GBurns]

You use the term "non-federal" but there could be the issue of other political entities. Is it under state, county or other public entity control?

You might want to look at PLR 9152028 and Revenue Ruling 74-608 which are some of the determinations that have been issued stating that public School Board members (elected or appointed) are employees for withholding purposes.

You also might want to look at PLR 9326050 and PLR 9304026 which relate to Utility Board and other public entity board members being treated as employees.

If your hospital Board members are already being treated as employee and getting W2s raises different issues than if they are being treated as independent contractors. It seems that in most public entity cases the Board Members and Commissioners must be treated as employees.