If a health insurance plan reimburses you more than your actual medical expenses, you may have to include the excess in income.
If your employer did not pay any of the cost of the health insurance plan, none of the excess reimbursement you receive is taxable.
If your employer paid for the coverage but included the premiums in your taxable income, none of the excess reimbursement you receive is taxable.
If your employer paid the entire cost of the health insurance premiums and did not include the cost in your income, the entire excess reimbursement is taxable to you.
If you paid part of the premiums, part of the excess reimbursement is taxable.
In this last case, if both you and your employer contributed to paying the premiums for the health insurance plan, you have to include in your taxable income the proportional part of the excess reimbursement that corresponds to the employer’s contribution to the cost. For example:
if the total health insurance premium for the year is $1,200,
you pay $300 and your employer pays $900, and
you receive an excess reimbursement of $400,
you would have to include 75% of the excess reimbursement in your taxable income (your employer’s contribution of $900 divided by the total cost of $1,200).
Your taxable part of the excess reimbursement would be $300 (75% of $400 = $300).
Health Reimbursement Arrangements
A health reimbursement arrangement (HRA) is a plan, funded by an employer, that reimburses employees for medical care expenses and allows employees to carry forward amounts they do not use. An HRA is funded entirely by the employer (not by an insurance company) and the reimbursements you receive for medical expenses are not taxable, up to a certain amount per coverage period.