If your employer pays some or all of your health insurance or hospital insurance premiums, the premium payments aren't taxable. The federal Affordable Care Act requires your boss report the value of your coverage on your W-2, but that doesn't turn it into taxable income. When you actually use the insurance, in certain circumstances you may owe tax for your benefits, but that's not usually the case.
If you buy your own hospital or health insurance, none of the benefits are taxable. Even if you're part of a group plan at work, there's no tax on benefits if you pay 100 percent of the premium. If your employer pays the entire premium, the benefits are potentially taxable. As you can imagine, if you pay a percentage of the cost, a percentage of the benefits is tax-free. If your employer pays 25 percent, say, 75 percent of the benefits are safe from taxation.
What It's For
If all your policy does is pay for your hospital bills, don't worry. Even if your employer pays the entire premium, reimbursement for medical costs isn't taxable income. Whether your insurer pays the hospital direct or reimburses you for the payments, you're off the tax hook. If you take a tax write-off for medical expenses, though, whatever bills get reimbursed -- whether it's by your employer or some other source -- are not deductible.
Insurance for your family follows the same rules: money reimbursing you for your spouse or child's hospital stay or medical tests isn't taxable. This also applies to parents, siblings or siblings' children provided they meet the IRS test for a dependent exemption. Under the Affordable Care Act, you can cover your children until they turn 26. Your children can sign up even if they're married or can get health insurance through their own employers.
As of 2013, the IRS treats insurance your domestic partner differently. Reimbursements for medical treatments and hospital stays are still tax free, however. The money your employer spends to buy your partner's coverage, however, counts as a taxable fringe benefit. Benefits besides reimbursements may also be taxable, no matter who receives them. Any benefits in the form of sick pay or reimbursement for missed wages during a hospital stay are taxable, just like sick-leave pay.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.