26 U.S.C. § 106 — Contributions by employer to accident and health plans

(a) General rule. Except as this section otherwise provides, when an employer pays for an employee's coverage under an accident or health plan, that value is not counted as the employee's taxable gross income. (b) Contributions to Archer MSAs. (1) If an eligible employee's employer puts money into that employee's Archer Medical Savings Account (MSA), the contribution is treated as tax-free employer-provided health coverage, up to the limit set in section 220(b)(1) (figured without counting this subsection) that applies to that employee that year. (2) The employee doesn't owe tax just because they got to choose between an MSA contribution and coverage under another employer health plan; that choice alone doesn't create taxable "constructive receipt" income. (3) An employer may deduct its MSA contribution, if otherwise allowed, only for the tax year it's actually paid. (4) Anyone required to file a tax return must report on it the total amount employers contributed to that person's or their spouse's Archer MSAs that year. (5) This tax-free treatment does not apply for purposes of the COBRA continuation-coverage rules in section 4980B. (6) "Eligible individual" and "Archer MSA" have the meanings given in section 220. (7) Cross reference: section 4980E sets a penalty if an employer fails to make comparable MSA contributions for comparable employees. (c) Long-term care benefits through flexible spending arrangements. (1) If an employer provides coverage for qualified long-term care services (as section 7702B(c) defines them) through a flexible spending or similar arrangement, that coverage counts as the employee's taxable gross income — it is not tax-free under this section. (2) A "flexible spending arrangement" is a benefit program where specified incurred expenses may be reimbursed, subject to reimbursement limits and other reasonable conditions, and where the maximum amount reasonably available to a participant is less than 500 percent of the value of the coverage. For an insured plan, that maximum is figured based on the underlying coverage. (d) Contributions to health savings accounts (HSAs). (1) If an eligible employee's employer (as section 223(c)(1) defines "eligible individual") contributes to that employee's HSA (as section 223(d) defines it), the contribution is treated as tax-free employer-provided coverage, up to the limit in section 223(b) (figured without this subsection) for that employee that year. (2) Rules similar to paragraphs (2) through (5) of subsection (b) — on constructive receipt, deduction timing, reporting, and COBRA — apply here too. (3) Cross reference: section 4980G sets a penalty if an employer fails to make comparable HSA contributions for comparable employees. (e) FSA and HRA terminations to fund HSAs. (1) A health flexible spending arrangement or health reimbursement arrangement does not lose its tax treatment under this section or section 105 merely because it allows a "qualified HSA distribution." (2) A "qualified HSA distribution" is an amount moved from a health flexible spending arrangement or health reimbursement arrangement to an HSA, limited to the smaller of the arrangement's balance on September 21, 2006, or its balance on the date of the distribution, and only if the employer contributes it directly to the employee's HSA before January 1, 2012. Only one such distribution is allowed per arrangement. (3) Extra tax for losing high-deductible coverage. If, at any point during the "testing period," the employee stops being an eligible individual, the distributed amount becomes includible in the employee's gross income for the year that happens, and the tax for that year increases by 10 percent of that amount. Exception: this does not apply if the employee stops being eligible because of death or because the employee becomes disabled (within the meaning of section 72(m)(7)). (4) Definitions: the "testing period" runs from the month the distribution goes into the HSA through the last day of the 12th month after that. "Eligible individual" has the meaning in section 223(c)(1). A qualified HSA distribution is treated as a rollover contribution described in section 223(f)(5). (5) Tax treatment of distributions. A qualified HSA distribution is treated as a payment described in subsection (d). Section 4980G's comparability excise tax generally does not apply to qualified HSA distributions — except that if an employer offers the distribution to some eligible employees under a high-deductible plan but fails to offer it to all of them, that failure is treated as violating section 4980G(b), notwithstanding section 4980G(d). (f) Menstrual care products. For this section and section 105, expenses for menstrual care products (as section 223(d)(2)(D) defines them) are treated as expenses for medical care. (g) Qualified small employer health reimbursement arrangements. For this section and section 105, payments or reimbursements an individual receives from a qualified small employer health reimbursement arrangement (as section 9831(d) defines it) for medical care (as section 213(d) defines it) are not treated as paid or reimbursed under tax-free employer-provided coverage for any month in which the individual lacks minimum essential coverage (within the meaning of section 5000A(f)).