Q: Our church has several employees who opt out of group health insurance and instead elect to participate in a group “health sharing plan.” It is my understanding that any out-of-pocket health expenses incurred by an employee are eligible for a Flexible Spending Account (FSA), provided they are included on the Internal Revenue Service’s (IRS) list of eligible reimbursed expenses.
Could you please clarify if the monthly “subscription” or “membership” cost for a health sharing plan paid by these employees could be covered as an FSA reimbursement?
And, more generally speaking, are there any situations in which a church pays the membership fee for a health sharing plan as a part of any tax-free fringe benefit plan?
“Medical insurance” does not include membership fees or subscription costs to a faith-based health sharing plan.
In general, since a fee or subscription is not included in the definition of a medical expense, it is not an eligible expense for “health plans” provided to employees. As such, the payments for these plans are not eligible medical expenses available for reimbursement from an FSA.
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We tell clients that employer-paid health sharing plan membership fees or subscription costs are taxable to employees.
A potential exception to the above advice is when churches create a “self-insured” health plan. Sometimes the church will use the health sharing arrangement to fund the benefits it owes under its self-insured health plan.
Affordable Care Act (ACA) compliance requires the church to have an unlimited liability for health benefits under the self-insured plan. Attorneys for health sharing plans sometimes recommend this approach. That’s because it is a way to incorporate health sharing plans into the church’s group health plan.
According to some health sharing plans, a church’s payment of the membership fee is not taxable to the employee. This is because the church’s self-insured plan is the sole beneficiary under the health sharing plan.
For this strategy to work, however, the church must draft and adopt a comprehensive health benefit plan. The comprehensive plan must meet all the requirements for a self-insured health plan under the ACA. The church should retain an experienced benefits attorney to consult on and draft such a plan.
In June of 2020, the IRS issued a proposed rule changing the above advice. The new rule proposed regulations defining “insurance” for purposes of medical expenses to include heath sharing plan arrangements.
People submitted comments and the IRS scheduled a public hearing, but they never published the regulations. Therefore, the long-standing advice described above remains current until the IRS publishes the proposed regulations. With the current moratorium on new regulations, it is doubtful this will occur in the near future.
In summary, we tell churches to tax the membership fees or subscription costs of health sharing plans to employees.
This is unless the church has a qualifying self-insured health plan covering the costs.
