Under the federal Affordable Care Act, employers must start reporting the cost of your coverage on your Form W-2. This is not going to increase your taxes, so don't panic: Premiums your employer pays for health, accident or disability insurance aren't taxable income. Some benefits for sickness and accidents may be taxable, but that's true even without the ACA.
Benefits vs. Premiums
If you buy insurance through your employer but you pay all the premiums yourself, any claims you make that your insurer pays are tax-free. If your employer pays some or all of the premium, compensation for accidents and injuries turns into taxable income. For instance, suppose your employer pays 40 percent of the premiums. That would make 40 percent of the benefits taxable income. You don't have to report the rest to the IRS.
The taxability applies to benefits such as disability pay -- not money you spend on doctor visits and medical bills. If all you've used your insurance for is to reimburse you for prescription drugs and hospital stays, you don't owe tax. If your employer pays directly for your injuries or hospital bills or reimburses you for them, that money isn't taxable either. If, however, he pays to make up for work you've missed, the sick-leave pay is taxable income, just as if you'd been on the job to earn it.
If you serve in the military and receive disability pay for a combat-related injury, that money isn't subject to tax. Money you get under a workers' compensation plan for a workplace injury is also tax-free. If you get long-term care insurance as part of your benefits, the benefits you receive usually aren't taxed. This only holds true if the insurance provides nothing but care; if there's an annuity or lump-sum cash payment involved, it may be taxable.
A cafeteria plan is one that offers you a buffet of benefits to pick from: Adoption assistance, for example, a health savings account or accident and health coverage. If you choose health insurance and the employer pays the premiums, she may count the premiums as part of your taxable compensation. In that case, your benefits are tax-free. If your premiums aren't included as income, then whatever benefits you receive become taxable.
- Are the Wages Deducted for a Cafeteria Plan Tax-Exempt?
- Do I Have to Pay Taxes on a Cancer Policy Settlement if Premiums Were Paid Through a Cafeteria Plan?
- Does Collecting Severance in California Disqualify You From Unemployment?
- Is Short-Term Disability Considered on a Before-Tax or After-Tax Basis?
- Can I Pay My Insurance Premiums From My HSA?
- How Long Does It Take to Get Workers Comp?
- Do Insurance Settlement Payouts Due to Injuries Get Taxed by the Federal Government as Income?
- Can I Deduct Life Insurance That Is Paid Outside of an Annuity?