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The general tax treatment of accident and health benefits for employees for federal purposes are as follows:
Income Tax Withholding Exempt - except for certain long-term care benefits, this exemption does not apply to S corporation employees who are 2% shareholders or to certain highly compensated employees under a self-insured plan that favors those employees.
Social Security and Medicare - Exempt, except for certain payments to S corporation employees who are 2% shareholders.
Federal Unemployment (FUTA) - Exempt
This exclusion applies to contributions you make to an accident or health plan for an employee, including the following.
- Contributions to the cost of accident or health insurance.
- Contributions to a separate trust or fund that directly or through insurance provides accident or health benefits.
- Contributions to Archer MSAs or health savings accounts (discussed in Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans).
This exclusion also applies to payments you directly or indirectly make to an employee under an accident or health plan for employees that are either of the following:
- Payments or reimbursements of medical expenses.
- Payments for specific injuries or illnesses (such as the loss of the use of an arm or leg. The payments must be figured without regard to any period of absence from work.
Accident or health plan. This is an arrangement that provides benefits for your employees, their spouses, and their dependents in the event of personal injury or sickness. The plan may be insured or noninsured and does not need to be in writing.
Employee. For this exclusion, treat the following individuals as employees:
- A current common-law employee.
- A full-time life insurance agent who is a current statutory employee.
- A retired employee.
- A former employee you maintain coverage for based on the employment relationship.
- A widow or widower of an individual who died while an employee.
- A widow or widower of a retired employee.
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