Generally speaking, the value of the health insurance coverage provided by your employer is not included in your taxable income according to the IRS publication 525.
Despite this, the benefits that you receive from the plan may be included in your taxable income.
The status of your employer-provided health insurance as far as its inclusion in your taxable income depends on the following:
- your current status with that employer
- the nature of the health insurance coverage
- any dependents covered by that coverage
- other factors
However, in the majority of cases, the health insurance coverage will not be included in your taxable income.
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Long-Term Care Services
Your employer’s contributions to a health insurance plan that provides long-term care services are typically excluded from your taxable income. Long-term care services help people with routine activities for some time.
Contributions made through a flexible spending or similar arrangement (such as a cafeteria plan) have to be included in your income. Any contributions like this must be added as wages in box 1 of your Form W-2.
These sorts of plans are the most common employer-provided health care plans. Such plans must still be reported to the IRS, however.
Another type of health insurance plan provided by your employer is an Archer MSA plan. Contributions added to your Archer MSA are also generally excluded from your income, as well.
Include this amount in box 12 of your Form W-2, with code R. You must also report this amount on Form 8853 and file this form with your tax return.
If you are not certain whether your plan is an Archer MSA, we will outline what constitutes an Archer MSA. Archer MSAs are a savings account that earns tax deductible interest for medical expenses.
These accounts are often utilized by small businesses or self-employed individuals as a method of paying for healthcare expenses.
A health flexible spending arrangement, also known as a health FSA, is another category of employer provided healthcare plan.
If your health FSA qualifies as an accident or health plan, do not include salary reduction or medical care reimbursement in your income.
A health FSA is a special account you deposit money into in order to use it for paying for certain out-of-pocket health care costs.
In addition to using this money for deductibles and co-payments, it is also acceptable to use this money for prescription medications and purchasing medical equipment.
One more type of employer-provided health care is a health reimbursement arrangement, also known as a health HRA.
In the event that this employer-provided HRA qualifies as an accident or health plan, coverage and the reimbursement payments of your medical care expenses are generally not included in your income.
HRAs are group health plans funded by your employer that provide tax-free reimbursement for participating employees and this reimbursement is used to repay accepted medical costs up to a certain number of dollars per year.
If you are an eligible individual, you, as well as anyone else, including your employer and family members, can make contributions to your health savings account.
Contributions made to health savings accounts, or HSAs, aside from employer contributions, are deductible on your return regardless of whether or not you itemize deductions.
Employer contributions to HSAs, on the other hand, are not included on your income.
Distributions from an HSA utilized to pay for qualified medical expenses are not included in your income. If the distributions are used to pay for anything else, they are included in your income.
An HSA is a type of savings account that allows you to set aside money before taxes for the purpose of paying qualified medical expenses in the event your health care plan has a high deductible.
Making a one-time distribution from your individual retirement account to your HSA is also generally not included in your income. However, the distribution must be considered qualified in order for this to be the case.
Dependent Care Benefits
Sometimes, employer-provided health care plans also add dependent care benefits, as well. You may have the option to exclude such benefits from your income.
Dependent care benefits include amounts your employer pays to you or your care provider for the medical care of the qualifying dependent while you work.
These benefits also include the fair market value of care in a daycare facility provided or sponsored by your employer.
However, the amount of such benefits you can exclude from your income is limited. It is limited to the lesser of the following:
- total amount of dependent benefits you received during the year
- the total amount of qualified expenses you incurred during the year
- your earned income, your spouse’s earned income, or $5000 ($2,500 if married filing separately)
Your employer must include the total amount of dependent care benefits provided to you during the year under a qualified plan in box 10 of your Form W-2.
Your employer must also show any dependent care benefits over $5,000 in your wages shown in box 1 of your Form W-2. To get the exclusion, you have to complete Part III of Form 2441.
Group-Term Life Insurance
Generally speaking, the cost of up to $50,000 of group-term life insurance coverage provided to you by your employer or former employer is not included in your income.
Despite this rule, you must include the cost of employer-provided insurance that is more than the cost of $50,000 in your income. You also have to reduce this number by any amount you pay toward the purchase of the insurance.
Group-term life insurance is term life insurance protection that does the following:
- provides a general death benefit
- is provided to a group of employees
- is provided under a policy carried by the employer
- provides an amount of insurance to each employee based on a formula to prevent individual selection
Your group-term life insurance may include permanent benefits. If this is the case and it includes permanent benefits such as a paid-up or cash surrender value, you must include this amount in your income as wages minus any amount you pay for.
Insurance that provides accidental or other death benefits but not general death benefits is not classified as group-term life insurance.
If your former employer did provide more than $50,000 in group-term life insurance coverage during the year, that amount must be included as wages in your Form W-2.
Additionally, even if you have multiple employers, your exclusion for group-term life insurance coverage may not exceed $50,000.
Health Care Benefits
In quite a few cases, you must include any amount you gain due to personal injury or sickness through a health plan or an accident plan that your employer pays for as a portion of your income.
If you and your employer both pay for the plan, you only have to report the amount you receive due to your employer’s payments as income.
You should not include any amount you were paid for earlier medical expenses you had to pay for prior to your coverage under the plan.
If you pay for the entirety of a health care plan or an accident plan, you should not classify any amounts you receive from it as taxable income on your return.
If your plan paid you back for medical expenses you subtracted in a previous year, you might have to include a portion or the entire amount in taxable income on your return.
A Review of Health Insurance Provided by Your Employer
As stated in the beginning of this article, the general rule is that employer-provided health insurance is not classified as taxable income on your tax return. Some benefits are considered taxable income, however.
Additionally, your health insurance’s status as taxable income varies depending on what kind of health insurance you have. It is always best to check official sources to determine your own situation.
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