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We are a church in Texas. The pastor's contract with the church includes payment for health insurance for him and his family. The pastor's wife turned 65 this year and is now eligible for Medicare. We have agreed to pay her premiums (A,B, C, D), giving her the equivalent of the insurance that she had before. Now, instead of us paying the company directly, she is documenting her Medicare expenses and we are reimbursing her.

We've called the IRS several times, but we always get the lowest level peon who is either non-committal, or is "pretty sure" or has such bad grammar that we don't trust the answer. We can not get a straight answer from anyone at the IRS as to whether this is taxable income.

We have been providing insurance for her for 20 years and those premiums have not been taxable. So why should that change? So the question is, are insurance premium reimbursements considered taxable income?

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  • If the IRS can't answer it, your next step should probably be a CPA.
    – ceejayoz
    Commented Nov 26, 2019 at 14:27
  • @ceejayoz It's hard to find a CPA that understands church worker income tax. Pastors are these amphibious beings which are employees and yet pay self-employment taxes. It's the bane of the volunteer church treasurer that one just guesses one's way through and hopes that any errors are considered "in good faith."
    – B. Goddard
    Commented Nov 26, 2019 at 14:32

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Employers may reimburse employees for medical costs through a Section 105 plan, named after the IRC Section 105. Reimbursements made this way are tax free to the employee. Reimbursements can be used to pay insurance premiums, including Medicare premiums and Medicare supplement premiums. Small employers often implement a QSEHRA (qualified small employer HRA) which is a type of Section 105 plan that essentially allows employees to spend up to a specified limit each month, tax free. This plan type was designed for small businesses and is a popular choice for churches. This link is from a benefits vendor but it gives a good overview on QSEHRAs and churches. (I have no affiliation with this vendor).

The details on how this may apply for your church may vary depending on how you're implementing your current medical benefits. It's fairly common to use a QSEHRA as the sole means for funding medical benefits; employees then select their own medical plan(s) and pay out of their monthly allowance.

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