Texas Clarifies Sales Tax Obligations of Employee Benefit Plan Administrators

In a recent letter ruling, Texas outlined which parts of the services offered by a company that designs and administers employee healthcare and retirement plans for employers are subject to sales tax. In their findings, the Comptroller outlined the two services involved in the professional services that could be subject to tax: insurance services and data processing services. In particular, the state pointed out their definition of a taxable insurance service, which includes, ” insurance loss or damage appraisal, insurance inspection, insurance investigation, insurance actuarial analysis or research, insurance claims adjustment or claims processing, or insurance loss prevention service.” Under these definitions, a service provider who administers an employee insurance program, but does not themselves determine eligibility or process claims, does not provide a taxable service. Also, data processing of insurance data, when done only to facilitate a nontaxable service, is not in itself a taxable data processing service.

Based on these definitions, FSA and COBRA program administration services were determined to be professional services, not subject to tax as either data processing or insurance services. The taxpayer‘s ACA Comprehensive and Eligibility Verification Audit services included investigation into eligibility for coverage, and therefore fell under the definition of taxable insurance services. The ACA Reporting-Only service offered, which only maintained data for ACA compliance, was found to be a data processing service which is taxable.

Outside of their insurance offerings, the company’s Retirement Plan Administration and 401(k) Plan Recordkeeping Services were found to both be nontaxable financial services, similar to nontaxable accounting services, as they require professional knowledge of law and only used data processing to facilitate their professional services. (Texas Comptroller of Public Accounts, TX, Private Letter Ruling No. 20220222104614, August 21, 2023)

Posted on August 5, 2023