Reporting Forgiven Arrears Balances as Imputed Income

[ACC]

If an employer uses the arrears method for collecting an employee's obligations for H&W benefits while they are on unpaid LOA and the employer elects to forgive the balance in lieu of collecting the balance is there any way to do that and avoid having to impute income to the employee? If the employee owes a balance and instead of collecting the balance the employer would like to forgive the amount do we have to include the forgiven amount as imputed income on the employee's W-2? Thanks.

[Chaz]

This is an interesting question.  Without researching, I question whether the employer would need to impute any income based on the forgiven debt.  The employer's payment of premiums is tax free to the employee under the Code and employees can pay their portion on a pre-tax basis through a cafeteria plan.  Wouldn't that mean that forgiving the debt would not be a taxable event?

[Luke Bailey]

Chaz makes an interesting point, and maybe that argument would work with IRS. I guess another way to look at it, though, would be that it is the employer's choice whether to pay premiums for the employee or former employee, which would be tax-free, but if it's policy, e.g. in writing, is that it will not do that, then that creates a debt, separate from the 105 plan exclusion, and if you forgive that debt, the employee has forgiveness of debt income. Having said that, I will again say that Chaz's argument seems a good one tp me and might well be accepted by IRS.