Medical Ins.

[peggysioux]

Taxpayer has sole prop. business and had to lay off employee, but continued to pay the employee's medical insurance for the year. I don't think that the deduction would be a allowable being employee no longer employed, but thought I would see if you are aware of any way that it could be deductible.

Thanks.

Peggysioux

[Burke]

I suppose it could be deductible, but would it not be taxable income to the ex-employee? Is the layoff intended to be a temporary absence?

[peggysioux]

Medical Insurance

That was my thought too; but employer did not set up as payroll and paid no payroll taxes. This is for a 2010 tax return that taxpayer is just now handling. It could have been thought to be a temporary lay-off, as employer did have payroll for employee in January of 2011, but that was it for 2011. So, if employer did not set up as payroll, would the insurance expense be deemed an undeductible expense?

[Burke]

The value of employer-paid health insurance provided to employees is excluded from employees' taxable wages. However, in the case of a terminated employee, it would seem to me that it would be taxable income to that person. It would be like a retirement benefit, perhaps reported on a 1099-R, or Form 1099MISC, Box 3, Other Income -- not a W-2. I have never seen this before, so I cannot say for sure. Interesting, though. Just my 2 cents worth. That would mean a tax deduction for the employer. I also would be very surprised at a group health insurance plan which would allow a terminated employee to remain insured. It wasn't COBRA?

[JohnH]

Interesting question. I would have thought that it is a deductible expense for the same reason that health insurance premiums paid on behalf of retired employees are a deductible expense. But maybe I'm making an irrational leap there.

[Zee]

Temporary or Permanent

IMHO, I believe the answer would depend on whether the layoff is temporary or permanent in nature. In the event of a temporary layoff, when coverage benefits are extended for the duration of the temporary layoff period,it would seem the employer share of the contribution is not counted as taxable income and would be deductible to the business. Once the layoff is determined to be permanent, the recipient would no longer be an employee and the payment would be non-deductible to the business and taxable to the recipient.

[peggysioux]

Medical Insurance

It was not cobra insurance; employer just continued to pay insurance after layoff. But employee had no 2010 wages and employer paid insurance for all of 2010. I was surprised that insurance continued to cover. Could be that renewal came right before layoff so insurance co. would not know that employee no longer employed. Being we are already into 2012, would other tax preparers make the expense a non-deductible business expense?

[S T]

Is this Group Insurance through the Employer, or is the Employer paying the Individuals Insurance Premium on an Individual Plan or extended Plan - You said no Cobra - but that is what it sounds like.

If Group Insurance and no Cobra provision, I am surprised that the Employer can maintain the insurance for the terminated employee - but then I also know the Group Insurance Med Carriers don't audit records the same way Work Comp does.

Hmm-wonder does this terminated employee have any relationship to the Employer - like a Family Member?

Sandy

[peggysioux]

Medical Insurance

Either way - employer sponsored insurance or private insurance of employee paid by employer, it wouldn't be deductible by employer if no longer employee, would it?

[Gary2]

Either way - employer sponsored insurance or private insurance of employee paid by employer, it wouldn't be deductible by employer if no longer employee, would it?

Is severance pay deductible? What makes this different?

[S T]

Wouldn't severance pay be taxable to the "terminated" employee?

Sandy

[peggysioux]

Medical Ins.

Yes, severence pay would be taxable to employee and my thoughts are if employer had made the medical insurance taxable to the employee than the medical insurance expense would be deductible. But being that did not happen with employer and we are talking about a 2010 tax return, I am leaning towards a non-deductible expense, but wanted to know how other tax preparers would handle the expense.

[JohnH]

I'm still leaning toward it being a deductible expense, but I don't have a cite.

(the question about this being family members was an excellent one - that might be a game changer).

[peggysioux]

Medical Ins.

Yes, it is a family member - employer's brother. Brother had been an employee for several years, but with the slow down of the economy, had to be laid off. So would you agree no deduction?

[JohnH]

Well, the employment relationship is long enough to indicate it's legitimate. Were there other employees, other layoffs, others covered or not covered? It may be be very much a "facts & circumstances" issue.

I'm still reluctant to say "absolutely not", but I don't have a cite one way or the other. I've tried to research it some, but nothing exhaustive. I'd lean more in the direction that it's deductible by the employer but maybe taxable income to the ex-employee, but still no cite. So I can't say rely on me - you need more reliable advice.