FOLLOWING the issuance of Revenue Memorandum Circular (RMC) 50-2018, many tax treatment and procedural questions relating to the implementation of the TRAIN law, particularly on income and withholding tax, were clarified. However, there is one particular question which seems to have left tax practitioners with more questions than answers, and this is the tax treatment of premiums related to employee group health insurance.
Under RMC 50-2018, premiums on health cards paid for by an employer under a group insurance policy is considered part of the employees’ P90,000 tax-exempt threshold for 13th month pay and other benefits. As such, it would seem that the P90,000 threshold would not go far since it would be quickly depleted by 13th month pay, insurance premiums, and all other employment benefits, such as monetized unused vacation leave credits, benefits under a collective bargaining agreement and productivity incentive schemes, benefits given during Christmas, etc.
Since insurance premiums are generally paid at the beginning of the year, this would further suggest that the tax-exempt threshold would be applied first on the premium payments, leaving the balance to cover for 13th month pay, bonus, and other benefits. Thus, any amount in excess of the threshold would then be subject to income tax.
This caused concern among employers as it conflicts with the BIR’s earlier position that premiums for group insurance of employees are exempt from tax.
The tax exemption for group insurance premiums is clearly laid down under Section 2.33 (C) of Revenue Regulation (RR) No. 3-98 (otherwise known as the Fringe Benefits Tax or FBT regulations) which provides that contributions of the employer, for the benefit of the employee’s retirement, insurance and hospitalization benefit plans, are not subject to FBT. While the RR expressly mentions a caveat that exemption from FBT shall not be interpreted to mean exemption from any other income tax, the BIR, in a number of tax rulings, has nonetheless ruled that such premiums are likewise exempt from income tax and consequently, from withholding tax on compensation.
This general practice can be further traced back to a 1974 tax ruling, which does not consider these premiums to be income to employees, citing as a reference Mertens Law of Federal Income Taxation. The theory behind the exemption was that the premiums were paid by the employer not as compensation to the employees but as an investment in increased efficiency for contingency purposes. By nature, to be ‘contingent’ means that there is no actual receipt of income until the fulfillment of a condition, e.g., sickness, death, etc. And so, how can constructive receipt of income apply specifically to premiums on group insurance policies where the beneficiary is collective and the availability of the benefit is contingent upon unforeseeable events, i.e., the employee’s continuance of his present employment (which might be terminated at any time) and the occurrence of the insured risk (e.g. sickness, disability, death, etc.)? While there is no requirement for the BIR to adopt US tax rules or interpretations for Philippine tax purposes, the principles behind these rules may, nonetheless, be relied upon as having persuasive effect on Philippine law since our Tax Code was patterned after the US Tax Code.
That said, historically, even before the express tax exemption under the FBT regulations, premiums on employee group insurance paid by employers had already been considered as non-taxable on the part of employees.
RMC 50-2018, however, finds support in a Court of Tax Appeals (CTA) case, which found that premium payments for employee group insurance are subject to income tax. However, by way of exception, the court ruled that medical insurance premium expenses may be deemed a de minimis benefit exempt from FBT, income tax, and withholding tax on compensation, provided that the following conditions are satisfied:
1. They must be furnished by the employer to his employees, both managerial and rank and file;
2. They do not exceed P10,000 per annum; and
3. They must be actually used or utilized for medical reasons, properly substantiated with official receipts.
Therefore, if the employer provides more than the prescribed P10,000 ceiling, only the excess amount should be considered in computing the P90,000 tax-exempt threshold, and only the amount in excess of the P90,000 tax-exempt threshold shall be taxable to the employee.
If the BIR’s current tax position were to stand, this would entail a lesser tax-exempt amount of 13th month pay and other benefits to employees. Further, to an employee who was able to fully exhaust the P90,000 tax-exempt threshold with his 13th month pay and other benefits, the taxation of premium payments will result in reduced take-home pay since the additional tax payable will be sourced from the employee’s salary. Ultimately, an employee, who was able to fully exhaust the P90,000 tax-exempt threshold, but was NOT able to claim or use his insurance benefit in the absence of a ripened contingency, would be taxed on an “income” that he never actually nor constructively received — a paradox which absolutely contradicts the very essence of income taxation.
Taxpayers can only hope that the BIR gives this matter a second look. However, until luck favors the taxpayer and the BIR issues further guidelines, employers and employees are bound to implement RMC 50-2018 and pay the corresponding tax due on such premium payments.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Nadine E. Chan is a Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
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