Fringe benefits are taxable income, just as much as wages. Driving a company car on personal time, for example, is often taxable: your boss figures the cash value of your benefit and reports it on your W-2. Employer-funded health insurance, however, isn't usually taxable -- your W-2 doesn't even mention it.
When your employer's health plan pays for or reimburses you for the cost of health insurance, it's not only non-taxable, it's excluded from your income -- you don't even have to report it. Payments to a health savings account and reimbursements for medical bills are also exempt if they're part of a plan. Sickness and injury benefits get the same exclusion, too, provided they're not just a substitute for lost wages while you're out of work.
Your employer just giving you money for medicine does not a plan make. A plan is an established arrangement that provides health benefits for you and your co-workers, along with spouses, dependents and adult children under 27. It doesn't have to involve insurance, and it doesn't need to be in writing. Not only are payments under the plan exempt from income tax, you don't pay Social Security, Medicare or federal unemployment taxes on it.
If you leave your job but keep your employer-based insurance under COBRA, any reimbursement you get is still excluded from your income. Highly compensated employees are another special case. If your employer has a reimbursement plan that gives the best benefits to the highest-paid employees -- the five highest-paid in the company, for example -- then the reimbursements are vulnerable to income tax. They're still exempt, however, from Social Security, Medicare and unemployment.
When you get sick or injured and your insurance has to kick in, that's when you may have to pay tax. If your employer paid 100 percent of the premiums, or reimbursed you for the whole cost, all the benefits you get are taxable. If you pay part of the premiums, they're partially taxable. You pay 40 percent, say, and 60 percent of the benefits are taxable income. If you pay 100 percent of the premiums, the benefits are tax-free.
- George Doyle/Stockbyte/Getty Images
- IRS Deductions for Medical Expenses
- Do I Have to Pay Taxes on a Cancer Policy Settlement if Premiums Were Paid Through a Cafeteria Plan?
- Federal Tax Rules for Short Term Disability Income
- Are Disability Benefits Considered Earned or Unearned Income?
- Are the Reimbursements for the Closing Costs for a Relocation Taxable Income?
- Do You Have to Declare Insurance Payouts?
- Do I Have to Pay Federal Taxes on $3,000 of Self-Employment Income?
- Can I Claim the Deduction on My Paycheck for Health Insurance Premiums Paid by My Employer?