While employers may offer some fringe benefits that are considered to be taxable as income, health insurance is not one of these items. Both insurance premiums and long-term care insurance, when offered by an employer, are non-taxable benefitsts. There are a few exceptions to this rule. Here is a look at how health insurance is viewed in the tax code, the exceptions that make it a taxable item, and when it is a tax deduction instead.
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Employer-Paid Health Insurance: The Basics
Health insurance is one of the most common benefits found with many full-time positions. Because of the Affordable Care Act, employers with more than 50 full-time employees must offer health care. Small businesses, while not under the same requirements, are given tax incentives to pay all or a part of their employee health insurance premiums.
Understanding the 1095-B Tax Form
Because the Affordable Care Act requires all individuals to have health insurance or to pay a tax penalty, employers now send out a 1095-B Tax form. It is scheduled to come by mid-March of each year. This form is proof that a person or a family had health coverage. It is designed to help taxpayers avoid tax penalties associated with not having health insurance during a tax year.
Exceptions to Non-taxable Health Insurance
Employees of an S-Corporation who own at least 2 percent of the business must count their health insurance premium cost as wages if they are paid for by the corporation. The cost is included in an income tax calculation, but it is not subject to Social Security, Medicare, or unemployment taxes.
Percentage of Covered Insurance can Vary
While laws exist to provide minimum coverage for employees, the cost to cover a family will often come out of the pocket of the employee. A survey of 2016 health benefits from the Kaiser Foundation showed that:
- On average, workers cover 18 percent of the premium for their own health insurance coverage and 30 percent of the premium for the coverage for their family.
- For single coverage employees in 2016, 12 percent did not have to pay any part of their premium, 62 percent paid less than a quarter of their premium, and two percent paid more than half of their premium.
- Workers contributed an average of $1,129 for their own health insurance premium in 2016 and an average of $5,277 for a family.
Paying into an Employer Health Insurance Plan
There are a number of ways that an employee may pay money through their employer to help save money on expensive medical bills. This can include a portion of the premium, a health insurance savings account, and a flexible spending plan. Not all of these plans are offered by every employer and each comes with its own tax rules.
- A premium is the price that you pay for coverage. As stated above, the portion of this premium that is provided by the employer is not included in taxable income in most cases. However, the portion of the deductible that is covered by the employee can be a tax deduction. The details of this are discussed in the next section.
- A Health Savings Account, or HSA, is a tax-deductible way to save money for large health bills. To qualify, you must have a high-deductible health plan and annual medical bills below a certain cap. These numbers are adjusted by the IRS each tax year. All contributions can be considered pre-tax through an employer or deducted from taxable income for those who have a personal account outside of work. Contribution limits are annually adjusted by the IRS and there is a catch-up contribution bonus for seniors. Only qualified medical expenses can be deducted without incurring a withdrawal penalty. Money in these accounts is available from year to year, but no advance is offered within a calendar year for future deposits.
- A Flexible Spending Plan is a pre-tax plan that is offered by some employers. Through this plan, an annual amount of money is withheld from an employee’s paycheck and not included in their income. This amount is pulled out of every one of an employee’s paychecks in equal portions throughout the year. It may be used for qualified medical expenses at any point of the year in full. This money will be lost if not used within the calendar year, with the exception of a $500 rollover.
Tax Deductions for Health Insurance Premiums
Any money that an employee contributes to their health insurance can be added to their medical expense total for a year. Any portion of this sum that exceeds 10 percent of taxable income is considered to be tax deductible by the IRS. Taxpayers must itemize their income taxes and use qualifying expenses only. These expenses include a number of overlooked items:
- Transportation and lodging costs associated with medical appointments. This includes mileage.
- Nursing home costs when the need for this care is medical.
- Transportation and fees for medical conferences regarding any chronic disease that the taxpayer or their family has.
- Eligible expenses for children under age 27 even if they are not dependents.
Self-Employed Health Insurance
In 2016, the Health Coverage Tax Credit, or HCTC, program launched to help self-employed individuals cover the cost of health insurance premiums. Recipients of this program get prepayment contributions from the IRS to help cover costs as they are incurred. The money is paid directly to the health insurance companies by the government. Again, these payments are considered to be refundable tax credits and are not considered to be taxable income.
Social Security, Medicare, and Worker’s Compensation
Wages are also subject to a number of prepayments that go into other kinds of health insurance coverage offered by the federal or state government. These programs may help to cover health costs in certain situations. They are not considered to be provided by the employer, however. An employee will pay a portion of every paycheck into these programs.
- Worker’s Compensation will pay for medical care from an injury that occurs on the job. They may offer payouts for certain permanent injuries as well. This program is offered by each state and the specifics vary as a result. The amount that each employee contributes is based on the level of assumed risk that comes with their job.
- Medicare is the health insurance program that is offered to all adults who are retired and above a certain age. It is a federal health insurance program. Supplemental insurance is commonly purchased by those who have this insurance type.
- Social Security is a federal program that is designed to provide supplemental income to those who are not working. While most associate this program with retirement, it is also used as a source of supplemental income by the disabled, widows, and widowers.
Because of the prohibitive cost of many medical procedures in the US marketplace, there is a wide variety of tax incentives that are offered to help employees to defray the cost of expensive procedures and basic preventative care.
The best way for any employee to discover the best combination of products to help serve their needs is to discuss the benefit opportunities with the HR department of an employer and a tax preparer.
Strategic planning can help to turn something that is difficult and expensive into a smart savings plan that will pay off in the form of a tax refund or an affordable medical bill. This can be a big relief to those who are facing the emotional implications of a major medical diagnosis.
While the medical diagnosis may or may not be preventable, the financial cost associated with the news can be lessened or defrayed with the help of smart tax breaks by a savvy employee who knows the right questions to ask.
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