Cash Allowance vs. Facilities: Tax Treatment of Employee Health Costs (General Illness)

Employee health is a priority, but the company's method of covering medical costs—whether through reimbursement or direct payment to health facilities—determines the different Income Tax Article 21 (PPh 21) treatments. Since the enactment of Minister of Finance Regulation Number 66 of 2023 (PMK 66/2023), the rules regarding non-cash remuneration or benefits in kind have changed significantly, especially for the treatment of diseases that are not occupational diseases (such as flu, fever, or other general illnesses).

Here is an in-depth review of the tax implications.

Basic Principle: Taxable-Deductible

Following the Harmonization of Tax Regulations Law (UU HPP), the general tax principle for employee remuneration shifted to Taxable-Deductible. This means costs incurred by the company for employee health can now be deducted from the company's gross income (deductible), but on the other hand, they potentially become taxable objects for the employee (taxable) depending on the method of provision and the type of illness.

Scenario 1: Reimbursement System

In this scenario, the employee pays for treatment first using personal funds for general illnesses (e.g., toothache or fever), then exchanges the receipt with the company for cash replacement.

• PPh 21 Aspect: Reimbursement of medical expenses in the form of cash is categorized as employment remuneration in the form of money. This replacement money is an Object of PPh Article 21. The amount of money received must be combined with the gross salary of the respective month to calculate the tax.
• Case Example: Mr. A has the flu and goes to the doctor with a cost of Rp1,000,000. He claims reimbursement from the office. The company transfers Rp1,000,000 to Mr. A's account. Thus, the Rp1,000,000 is considered additional income (like an allowance) subject to PPh 21.

Scenario 2: Direct Payment to Clinic/Hospital (Facility/Benefit in Kind)

In this scenario, the company cooperates with a clinic or hospital. Employees with general illnesses seek treatment there, and the bill is paid directly by the company to the clinic (the employee receives no cash). This is categorized as a Benefit in Kind (Kenikmatan).

• Exemption Rule (Negative List): Health facilities are excluded from PPh 21 objects (tax-free) only if provided for handling: (1) Work accidents, (2) Occupational diseases, (3) Life-saving emergencies, or (4) Follow-up treatment due to points 1 and 2.
• PPh 21 Aspect for General Illness: Since general illness (not occupational and not an emergency) is not included in the exemption list above, this facility is an Object of PPh Article 21 for the employee.
• Valuation: The taxable income value is calculated based on the actual costs incurred by the employer to the clinic/hospital.

• Case Example:

  Mrs. B (administrative staff) suffers from gastritis (general illness, not work-related). She goes to a clinic that cooperates with the company. The treatment cost of Rp500,000 is paid directly by the company to the clinic.

  Analysis: Since gastritis is not an occupational disease or a life-saving emergency, the facility worth Rp500,000 is considered Mrs. B's income (benefit in kind) and is subject to PPh 21 withholding in that month.

Corporate Tax Treatment (For the Company)

Regardless of whether the cost is provided through reimbursement or direct payment to health facilities, all medical costs incurred by the company in connection with employment are now deductible expenses from the company's gross income when calculating Corporate Income Tax. This differs from the old rule where benefit-in-kind costs were often fiscally corrected.

Conclusion

Companies must separate records between treatment for occupational diseases (tax-free for employees) and general illnesses. For general illnesses, both reimbursement and direct payment methods to hospitals now become components adding to the employee's gross income subject to PPh 21.

Regulatory References:

1. Law Number 7 of 2021 concerning Harmonization of Tax Regulations.
2. Government Regulation Number 55 of 2022 concerning Adjustments to Regulations in the Field of Income Tax.
3. Minister of Finance Regulation Number 66 of 2023 concerning Income Tax Treatment on Reimbursement or Compensation in Connection with Work or Services Received or Obtained in the Form of In-Kind and/or Benefits.
4. Memorandum of the Director General of Taxes Number ND-14/PJ/PJ.02/2024 concerning Affirmation of the Implementation of PMK 66 of 2023.