In Chief Counsel Advice 201547006 the IRS discusses the condition under which an employer can exclude an amount from an employee’s income for payments made through the employee’s spouse’s group health plan.

The advice begins by discussing general exclusion from income rules for medical benefits, noting:

Section 106 provides that “gross income of an employee does not include employer-provided coverage under an accident or health plan.” Section 1.106-1 provides that the gross income of an employee does not include contributions which the employee’s employer makes to an accident or health plan for compensation (through insurance or otherwise) for personal injuries or sickness to the employee or the employee’s spouse or dependents (as defined in section 152).

Section 105(e) states that amounts received under an accident or health plan for employees are treated as amounts received through accident or health insurance for purposes of section 105. Section 1.105-5(a) provides that an accident or health plan is an arrangement for the payment of amounts to employees in the event of personal injuries or sickness.

Under section 125, an employer may establish a cafeteria plan that permits an employee to choose among two or more benefits, consisting of cash (generally, salary) and qualified benefits, including accident or health coverage. Pursuant to section 125, the amount of an employee’s salary reduction applied to purchase such coverage is not included in gross income, even though it was available to the employee and the employee could have chosen to receive cash instead.

The ruling looks at seven specific situations, but effectively concludes:

An employer may exclude from an employee's gross income payments for the cost of health insurance coverage provided through the spouse's group health plan but only to the extent the spouse has paid for all or part of the coverage on an after-tax basis and not through salary-reduction under a section 125 cafeteria plan.

The examples also make clear that the payment can include after-tax amounts paid for both spouses by the spouse of the employee—so an employer could reimburse the payments tax free not only for the portion representing the cost of its employee, but also that of the spouse of its employee.

Note that the issue being discussed here is solely the question of whether the payment must be included in the employee’s income—the issue of whether the arrangement will or will not qualify as acceptable under Notice 2013-54 and the “market reforms” of the Affordable Care Act are not discussed, though since the agreement specifically limits itself to the spouse’s employer’s group health plan it seems likely the arrangements discussed generally will not run afoul of those rules (as an HRA may be intergrated with group, but not individual, coverage).

Another provision of the Affordable Care Act may prove more troublesome if and when it is enforced for such an arrangement.  Under Act Section 10101(d) an insured plan is not allowed to discriminate under rules “similar” to those for HRAs reimbursing other medical expenses.  However, pursuant to Notice 2011-1, this rule will not be enforced until such time as regulations implementing this provision are issued by IRS and Departments of Labor and Health and Human Services.