Are employer funded medical expense reimbursements taxable?

[dgharris03]

We have a high deductible group health plan (BCBS).  Employer also pays for out of pocket medical reimbursements (deductibles).  Employee does not pay into a fund for these reimbursements.  For the first two years of a three year contract, these reimbursements were paid out at the full amount of the expense.  This year, a new office assistant took taxes out of the reimbursement.  Did something in the tax laws change or did she do this incorrectly?

[Opus 17 · Accepted solution]

Could be either.

You are talking about an HRA: healthcare reimbursement arrangement.  Before the Affordable Care Act came into effect, employers could cover employee out of pocket expenses through an HRA.  HRAs can not be funded by the employee in any way.  The funds provided by the employer can have a yearly cap, or not, and unused amounts can roll over from year to year, or not. 

Two important changes occurred with the ACA.  1, employers who provided employees with an HRA only were in non-compliance, since an HRA is not "qualifying coverage" insurance under the ACA.  But an employer can have an HRA on top of other qualifying insurance.  2, under the ACA, employers can't discriminate among employees, everyone has to have the same options.  This means that it is not legal to have a tax-free HRA for only some favorite employees or employee classifications.  The way around this is to treat the reimbursement like a taxable bonus or additional compensation, withhold taxes, and add it to the W-2 wages.

So you may need to check with your HR department, ask them what research they did. It could be a mistake or it could be an adjustment due to the ACA.

[TaxGuyBill]

It is 99.9% chance that they are doing it the wrong way.  It should still be tax-free.