Premiums on health care are taxable, now what?

Following the issuance of RMC 502018, the Bureau of Internal Revenue (BIR) clarified that premiums on health care paid by an employer for all employees, whether holding rank and file or managerial/supervisory positions, under a group insurance plan shall be included as part of other benefits of these employees subject to the P90,000 exemption threshold.

Much has been said regarding this controversial issue which is laid down as Q&A Item No. 7 (“Q7 & A7”) in the RMC. Now let’s take a closer look at the practical implications of its implementation.

Who will shoulder the additional tax on health maintenance organization (HMO) premiums?

There’s no question that implementing Q7 & A7 of RMC 50-2018 will create additional income tax when the employees have fully exhausted the P90,000 tax-exempt threshold. The question is who will shoulder the additional tax on HMO premiums?

Following the rules, since the group HMO premium is subject to withholding tax on compensation, the initial answer would be that the tax should be borne by the em- ployee; but, is it that simple?

Unfortunately, it is not, since the additional tax will result in a reduction in the employee’s take-home pay. At a time of soaring inflation, any additional expense is unwelcome news. Moreover, if an employee was healthy all throughout the year and did not utilize his HMO benefit, should he be penalized with an additional tax?

Alternatively, if the employer absorbs the incremental tax, it will be an additional cost to the business that may further fuel inflation. Either way, the additional tax will adversely reduce the bottom-line income of the employee or the employer.

For a better understanding of the tax implications on either the employee or employer, a computation is provided by way of illustration.

Hypothetically, if the HMO premium is P2,000 per month and the P90,000 tax-exempt threshold had already been exhausted, an employee with an annual taxable income of P400,000 will have to pay an additional tax of P6,000.

If the employer absorbs the tax on the HMO premium, the employer will have an additional expense of P8,000 which translates to a total cost of P1.6 million for a company with around 200 employees.

When will the corresponding tax be reported and remitted to the BIR?

HMO premiums are generally paid at the beginning of the year and cover a period of one year. Now the question is when the tax on HMO premiums needs to be reported and remitted to the BIR. Should the tax be remitted upon payment of the premiums or should it be spread over the period of coverage and reported every month? Can the tax be remitted every quarter when the corresponding HMO expense is claimed as a deduction in computing the employer’s corporate income tax? Or can it just be reported at the end of the year when the actual tax rate of the employee is already determined?

To avert preparation of multiple reports to monitor the premiums paid, payable, or accrued for purposes of reporting the tax due, here’s a simpler way to report the tax due on the HMO premiums. Considering that HMO premiums are only taxable when the employee has fully exhausted the P90,000 tax-exempt threshold, employers may apply the tax-exempt threshold first on the HMO premiums and then recalculate the tax impact on total bonuses and other benefits, including the HMO premium, during the year-end annualization.

What other matters should the employer consider in implementing RMC 50-2018?

Since RMC 50-2018 was only issued on June 8, employers who treated the HMO premiums as non-taxable may need to assess the tax impact on resigned employees whose final pay was released prior to June 2018.

If the resigned employee has not exhausted the P90,000 tax-exempt threshold, the employer should consider reissuing BIR Form 2316 to reflect the HMO premium and reporting the item in the annual alphabetical list.

If the resigned employee exhausted the P90,000 tax-exempt threshold, the employer should consider recalculating the additional tax due on their account, remitting the amount to BIR and reissue BIR Form 2316 to the resigned employee.

For employers who have not yet assessed the impact of RMC 50-2018 on their company, they have less than three months left before the year-end annualization to do so.

More importantly, employers must not forget to communicate the impact of this RMC to their employees. After all, it is better to forewarn and prepare way in advance than to be blindsided at short notice.

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.

FLOREDEE T. ODULIO is a Director at the Client Accounting Services group of Isla Lipana & Co., the Philippine member firm of the PwC network. +63 (2) 845-2728 floredee.t.odulio@ph.pwc.com