Paying for VHI policies for employees and their family members is a common practice for many companies. There are certain peculiarities in accounting for the costs of this type of insurance. Let's get to the bottom of this.

VHI for employees

Legislation[1] allows businesses to include the cost of VMI policies for their employees in labor costs if certain conditions are met: 

• such expenses must meet the requirements of Article 252 of the Tax Code;
• the period of validity of the VHI contract must exceed 1 year;
• the insurance organization must have a special license.

If a taxpayer terminates a VHI contract before the expiry of one year from the conclusion of the contract, the costs taken into account for profit taxation purposes must be excluded from expenses. This position, in particular, is taken by the Ministry of Finance of Russia[2].

VHI expenses are rationed for profit taxation purposes. In particular, the taxpayer has the right to take the above costs into account in the amount not exceeding 6 per cent of the remuneration expenses.

Insurance payments on VHI are not subject to personal income tax[3] and insurance contributions[4]. At the same time to be exempt from insurance contributions there is a compulsory condition - VHI agreement must be concluded for the term of not less than 1 year. 

VHI for relatives of employees

The current legislation does not allow[5] businesses to take into account the expenses on VHI policies for relatives of employees for profit taxation purposes. This position is also shared by the Ministry of Finance of Russia.

VHI insurance payments in respect of relatives of employees are not subject to personal income tax[6] or insurance contributions[7].

Beginning in 2020, many employers were faced with the need to support workers who contracted a coronavirus infection. For example, some organizations decided to pay the cost of treating employees for coronavirus infection that was not covered by a VMI contract. This raised the question of how to account for the relevant contributions for personal income tax and insurance contributions purposes. 

The answer was given by the Ministry of Finance of Russia[8], which pointed out that:

• The amounts paid by employers for the treatment of employees are not subject to personal income tax (subject to the conditions stipulated by paragraph 10 of Article 217 of the Tax Code).
• Amounts paid by employers for treatment of employees are not subject to insurance premiums if: (1) the treatment was carried out on the basis of a supplementary agreement to the VMI contract concluded for a period of more than 1 year; (2) the treatment was carried out on the basis of a new VMI contract.

In view of the above, the procedure for accounting for VHI expenses depends largely on the specifics of a particular contract (term, whether the insurance company has a license, etc.). Therefore, it is important for businesses to monitor compliance with the relevant conditions in order to avoid the occurrence of negative tax consequences.