Voluntary Health Insurance for Employees: Taxes and Accounting

A VHI premium for an employee is the employee's income

Article 376 of the Tax Code treats as income in the form of material benefit the payment by a legal entity, in the taxpayer's interests, for goods (services), including vouchers for sanatorium treatment, inpatient and outpatient treatment or reimbursement of their cost, as well as other expenses of the legal entity that constitute the taxpayer's income.

An insurance premium under a policy where a specific employee is the insured person is a payment for a service in that employee's interests. As a general rule, therefore, it is the employee's material benefit, and the employer as a tax agent withholds PIT at 12% for residents (Art. 381). The tax may be withheld from any cash payments to the employee (Art. 388).

The exemption covers paying a clinic, not an insurer

Article 378, item 3, exempts amounts paid by an employer for outpatient and/or inpatient medical services for its employees and their children, as well as the employer's expenses on treatment and medical services. The condition is non-cash payment by employers to healthcare organizations, or cash issued to the employee on the basis of documents from healthcare organizations, or a transfer to the employee's bank account.

An insurance company is not a healthcare organization, and a premium is a payment for insurance, not for treatment. So, on the wording of the Code, this exemption cannot be applied directly to an insurance premium. If a PIT exemption matters to the company, the practical option is a medical services contract directly with a clinic, paid by bank transfer.

Insurance payouts to the employee

When an insured event occurs and the insurer pays for treatment or reimburses expenses, this is insurance compensation. Amounts received by citizens as insurance compensation are not included in aggregate income (Art. 369). Tax consequences arise when the employer pays the premium, not when the employee visits a clinic.

Social tax

The object of social tax is the employer's expenses on remuneration for work, and the base is the payments under Art. 371 (income in the form of remuneration for work) (Arts. 403, 404). Material benefit under Art. 376 is not on the list of remuneration income. So a VHI premium recorded as material benefit does not by itself increase the social tax base. If the company formalizes the compensation as a salary supplement, it becomes remuneration for work with all the related taxes.

Profit tax: no deduction

Article 317 of the Tax Code expressly lists as non-deductible voluntary insurance premiums paid by the taxpayer in favor of other persons (item 25) and expenses that constitute an individual's income in the form of material benefit under Art. 376 (item 3). VHI premiums for employees fall under both items, so they do not reduce the profit tax base.

Paying a clinic directly for employees' treatment is also material benefit under Art. 376, so it is likewise non-deductible under Art. 317, item 3, even though the PIT exemption in Art. 378, item 3, applies in that case. The difference between the options lies in the employee's PIT, not in profit tax.

VAT on insurance

Insurance services provided by professional insurance market participants, including their receipt of insurance premiums, are exempt from VAT (Art. 245). The employer has no input VAT on a VHI policy. A clinic's medical services are assessed separately, based on the supplier's e-invoice.

Three benefits options compared

In practice companies choose between three schemes. The tax burden differs mainly in the employee's PIT.

• a VHI policy with an insurer: the employee's material benefit with PIT (Arts. 376, 381), the premium is not deductible for profit tax (Art. 317), no VAT on insurance (Art. 245);
• a direct contract with a clinic paid by bank transfer: no PIT withheld (Art. 378, item 3), the expense is non-deductible as material benefit (Art. 317, item 3);
• cash compensation as part of salary: remuneration for work with PIT and social tax (Arts. 371, 403);
• in any option, set the terms in a local act so that the payment is not reclassified.

What to record in the accounts

• an order or policy on the benefits package: who is insured (employees, their children), at whose expense, how PIT is withheld;
• the insurance contract with the list of insured persons — the basis for allocating the premium among employees;
• a PIT tax register: the amount of material benefit per employee and the tax withheld (Art. 388);
• for direct clinic payment — a contract with the healthcare organization, a bank transfer, and service acts per employee;
• in the profit tax calculation — premiums and treatment payments as non-deductible expenses (Art. 317).