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 provides accident or health benefits directly or through insurance.
• Contributions to medical savings accounts (discussed in Publication 969, Medical Savings Accounts (MSAs)).

This exclusion also applies to payments you make (directly or indirectly) 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.

1. A current common-law employee.
2. A full-time life insurance agent who is a current statutory employee.
3. A retired employee.
4. A widow or widower of an individual who died while an employee.
5. A widow or widower of a retired employee.
6. For the exclusion of contributions to an accident or health plan, a leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.

Exception for S corporation shareholders. Do not treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power.

Exclusion from wages. You can generally exclude the value of accident or health benefits you provide to an employee from the employee's wages.

Exception for certain long-term care benefits. You cannot exclude contributions to the cost of long-term care insurance from an employee's wages subject to federal income tax withholding if the coverage is provided through a flexible spending or similar arrangement. This is a benefit program that reimburses specified expenses up to a maximum amount that is reasonably available to the employee and is less than 5 times the total cost of the insurance. However, you can exclude these contributions from the employee's wages subject to social security, Medicare, and federal unemployment taxes.

S corporation shareholders. Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the value of accident or health benefits you provide the employee in the employee's wages subject to federal income tax withholding. However, you can exclude the value of these benefits, other than payments for specific injuries or illnesses, from the employee's wages subject to social security, Medicare, and federal unemployment taxes.

Exception for highly compensated employees. If your plan is a self-insured medical reimbursement plan that favors highly compensated employees, you must include all or part of the amounts you pay to these employees in their wages subject to federal income tax withholding. However, you can exclude these amounts, other than payments for specific injuries or illnesses, from the employee's wages subject to social security, Medicare, and federal unemployment taxes.

A self-insured plan is a plan that reimburses your employees for medical expenses not covered by an accident or health insurance policy.

A highly compensated employee for this exception is any of the following individuals.

1. One of the five highest paid officers.
2. An employee who owns (directly or indirectly) more than 10% in value of the employer's stock.
3. An employee who is among the highest paid 25% of all employees, other than those who can be excluded from the plan.

For more information on this exception, see section 105(h) of the Internal Revenue Code and the related regulations.

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