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- Some forms of health coverage are considered to be fringe benefits and some are not
- Fringe benefits are benefits besides wages and salary that are considered to be income (and taxed as such) by the IRS
- To find out whether or not any of your health benefits are taxable fringe benefits, you have to do your own research as the issue is quite complex
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Whether or not health insurance is considered a fringe benefit is a question of great importance for both employers and employees.
“Fringe benefit” is a term which is usually used for taxation purposes. It is sometimes used colloquially to refer to all benefits offered by an employer, but this is not technically correct. This article will cover the literal meaning of the term as it relates to taxes.
There are many different types of fringe benefits, and which benefits are considered to be fringe benefits is often the source of a great deal of confusion. It is vital that every worker do their own research into the applicable tax law for their situation. To clear up this confusion, at least as it relates to health insurance, read on.
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What are fringe benefits?
To learn whether or not your health coverage may be considered a fringe benefit or not, you need to learn how the IRS defines fringe benefits. On the official IRS site, a fringe benefit is defined as “a form of pay for the performance of services. For example, you provide an employee with a fringe benefit when you allow the employee to use a business vehicle to commute to and from work.”
In practice, nearly anything except the actual salary or wages paid by the job is considered a fringe benefit, with many exceptions. Fringe benefits are taxable unless they are specifically noted as an exception. Some forms of health coverage are listed as exceptions and some are not.
Fringe Benefits and Cafeteria Plans
A cafeteria plan doesn’t actually have anything to do with food. It is a reimbursement plan that offers employees the option to get the benefits in cash instead. If benefits are offered in a cafeteria plan, they are not taxed until the employee actually either gets the cash or the benefit.
There are many benefits offered in cafeteria plans, including forms of health coverage such as health savings plans. Health Savings Accounts (HSAs) are allowed in cafeteria plans, but Archer Medical Savings Accounts (MSAs) are not.
Fringe Health Benefits That Are Exempt From Taxes
There are several different categories of health benefits that are exempt from taxes. The first one this article will cover is long-term care insurance. The IRS has implemented an exemption specifically for long-term care insurance, so these benefits are not taxed.
One related benefit that is not taxed is contributions to a trust fund set up specifically for health care.
Finally, contributions to health savings accounts are also not taxed under the current tax code. If your employer has an astute tax account, they may be able to structure your compensation so that the majority of your health benefits are not taxable.
COBRA Health Benefits
COBRA health benefits are also exempt from taxation. There is a common misconception that COBRA benefits are taxable, because they are not administered in the same way as non-taxable benefits. Some people even consider refusing COBRA benefits because they are worried that the benefits may result in increased tax liability.
If you have been offered health benefits through the COBRA program, rest assured you will not be taxed on these benefits.
Taxable Health Coverage Fringe Benefits
As previously discussed, health coverage, despite being considered a fringe benefit, is not usually taxed. However, there are exceptions to this. Flexible Health Savings Accounts are taxed as income because the beneficiary could take the money out and spend it on other expenses.
While HSAs are the most common taxable health coverage fringe benefit, they are not the only one. Most health benefits paid to 2 percent or more shareholders of S corporations are taxable. This is because these workers are able to avoid taxes on a great deal of their normal income.
How Fringe Benefits Are Taxed
Fringe benefits that the IRS has deemed to be taxable are taxed as income.
The monetary amount of the benefits is added to your wage or salary like it is another source of income. This addition could possibly put you in a higher tax bracket, in addition to inevitably costing you more in taxes.
This increased tax potential leads many workers to take action in an attempt to avoid receiving taxable health coverage fringe benefits.
How to Avoid Taxes on Health Coverage
Everybody wants to avoid as much taxation as possible. This is especially true for benefits, as people do not want compensation that they don’t receive as income to be taxed like income. The most common taxable form of health coverage is a flexible health savings account.
Some employers like to structure a portion of their health coverage benefits in this way because it is cheaper to offer than better insurance. If your employer offers you a flexible health savings account, try to get them to compare health insurance quotes online and get you a better policy instead.
Final Thoughts
As with many health insurance issues, there is no simple answer to the question heading the article. Some forms of health coverage are considered to be fringe benefits (and thus are taxable) and some are not. You have to do your own research and contrast and compare the best options for your own situation.
If you do decide to get a taxable health savings account, make sure to compare insurance quotes online if you are buying a supplemental policy. This will help you save a great deal of money, and you may even be able to make up for the additional taxes you’ll have to pay.
Health insurance costs vary by state, so we narrow our quotes by zip code to make sure you get the most accurate information available. In addition to our site’s wealth of health insurance info, we provide 100-percent free online quotes 24/7.
Click here and enter your residential zip code now to start saving!
[su_spoiler title=”References:” icon=”caret-square” style=”fancy” open=”yes”]
- https://www.irs.gov/publications/p15b/ar02.html#en_US_2017_publink1000193638
- https://www.irs.gov/publications/p15b/ar02.html
- http://www.mycafeteriaplan.com/types-of-plans/cafeteria-plans/
- https://www.taxslayer.com/support/555/What-forms-and-schedules-do-you-support-through-TaxSlayer-Web
- https://www.merriam-webster.com/dictionary/fringe%20benefit
- http://www.foxbusiness.com/features/2014/02/21/tax-benefits-health-insurance-and-fringe-benefits.html
- http://www.nolo.com/legal-encyclopedia/what-fringe-benefits-taxable.html
- https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues
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