Christmas is definitely here! As an early Christmas blessing to employees, the premium on group health insurance now reverts to being a non-taxable benefit and compensation.
By virtue of Revenue Memorandum Circular (RMC) No. 96-2018, the provision in the previously issued RMC No. 50-2018 stating that group health insurance premiums are taxable as compensation was deleted. Hence, we now apply status quo ante on the treatment of HMO premiums.
Prior to RMC No. 50-2018, the cost of premiums borne by the employer for the group insurance of their employees was exempt from fringe benefits tax and compensation tax. The exemption from fringe benefits tax was specifically provided under Revenue Regulations No. 3-98 and confirmed by Bureau of Internal Revenue (BIR) rulings. The compensation tax exemptions were held in various rulings issued by the BIR. In BIR Ruling DA-081-03, the BIR held that “where the employer decides to buy medical insurance for its employees, whether rank and file or supervisory, and their dependents, the insurance premiums paid by the employer shall be excluded from gross income and therefore not subject to withholding tax.” In BIR Ruling DA-139-05, the BIR reiterated the said ruling and held that “the premium payments made by the corporate employers for the benefit of its eligible employees (managerial and rank-and-file) are not subject to withholding tax on compensation nor to fringe benefits tax.”
The interpretation of both rulings was confirmed by the BIR during tax audits. In most cases, the audit findings include a difference in the amount of salaries and benefits claimed as expense vis-à-vis the amount reported in the alphalist and subjected to withholding tax. If the difference pertains to the amount of group health insurance premiums paid by the employer for its employees, the BIR examiners usually cancel the assessment for such item.
Many employees and other stakeholders were outraged by the inclusion of HMO premiums as taxable benefits. The inclusion resulted in additional tax burdens on many employees who were already receiving more than the P90,000 tax-exempt bonus.
Employees denounced the taxation of HMO premiums, saying that the new TRAIN Law — which was the basis of RMC No. 50-2018 — never stated that HMO premiums are taxable. They also argued that HMO premiums are benefits given for the convenience of employers, and that there was no constructive receipt of income on the part of employees.
Employers, on the other hand, also expressed their opposition to the taxation of HMO premiums on the basis that it was very difficult to implement on a per-employee basis. Employers would generally pay the premiums on group insurance. The changing composition of the group due to resignation, hiring, firing or promotion makes the identification of the specific premium per employee very difficult.
It is laudable that our tax authorities listened to the sentiments of many employee and employer groups. By deleting the controversial provision in the RMC imposing tax on health insurance premiums paid by employers for their employees, the BIR definitely made this a season of cheer and goodwill. With only several days before Christmas, this news is truly a great gift.
It is indeed a merrier Christmas with the HMO premium not being taxable. As we celebrate this much-awaited season, let us all be thankful and count our blessings. I wish you all a happy, merry, and stress-free holiday season. Merry Christmas to all!
Maricel P. Katigbak is a manager of the Tax Advisory and Compliance of P&A Grant Thornton. P&A Grant Thornton is one of the leading audit, tax, advisory, and outsourcing services firms in the Philippines.