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Paying Income Tax on Your Health Benefits?

Written by Nickel - 12 Comments

Paying Income Tax on Your Health Benefits?My wife recently received a mass e-mail from an acquaintance warning of a supposed healthcare-related tax hike. The e-mail referenced H.R. 3590 and stated that, starting in 2011, your employer will be required to report the total value of your employer-provided health insurance plan on your W-2 form.

This much is true, but… It then went on to warn that this amount will be added to your gross income, and that you’ll be required to pay taxes on it. Sounds scary, but guess what? It’s not true. While I typically just skip over such things, a reader subsequently forwarded a similar message to me, so I decided to tackle it head on.

Will you have to pay taxes on your health benefits?

One of the sources cited for this information was a recent article in Kiplinger’s by Joan Pryde. They specifically pointed to #3 in her list of 13 ways that healthcare reform will affect your taxes, which states:

3. A requirement that businesses include the value of the health care benefits they provide to employees on W-2s, beginning with W-2s for 2011. The amount reported is not considered taxable income.

(underlining added)

So yes, this information is being added to your W-2 form, but it’s not going to be added to your gross income. Rather, the reason that it’s being put there is so the IRS can compare it to the so-called “Cadillac” healthcare thresholds.

So… What’s the deal?

I’ve covered this before, but…

Starting in 2016 (five years after the W-2 reporting goes into effect), you’ll be subject to additional tax if your total health insurance premiums are more than $10,200/year for employee-only coverage, or more than $27,500 per year for a family plan.

More specifically, this provision levies a 40% non-deductible excise tax on healthcare benefits in excess of these thresholds, though there are a number of exceptions. Interestingly, in a rare stroke of foresight, Congress actually indexed these thresholds to inflation (at an annual rate of the CPI + 1%).

Oh, and just in case you needed a reminder… You can’t believe everything that happens to show up in your inbox. ;-)

Published on June 2nd, 2010
Modified on June 3rd, 2010 - 12 Comments
Filed under: Insurance, Taxes

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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12 Responses to “Paying Income Tax on Your Health Benefits?”

  1. 1
    Education and Labor Committee Says:

    For those who are interested in all the details, you can find the bill text, bill summary and multiple one-page factsheets about the bill here:

    http://edlabor.house.gov/blog/.....-ame.shtml

    Regarding the revenue provisions, here is a PDF that explains them – http://docs.house.gov/energycommerce/REVENUE.pdf

  2. 2
    Tyler Says:

    I’m confused – the employee pays a tax if they are being “ripped off” by their employer having an expensive health insurer?

  3. 3
    Nickel Says:

    Tyler: Since the employer typically pays a large percentage of the cost, it seems likely that the employer and employee would have the same interests in mind – namely the lowest possible cost for a given level of care.

  4. 4
    Courtney Says:

    Tyler, I read on Snopes that the insurance company pays the tax, not the employee (though in the end, doesn’t the consumer always pay?): http://www.snopes.com/politics/taxes/hr3590.asp

  5. 5
    Ginger Says:

    There is one time that you have to pay taxes on health insurance and that is when your domestic partner (not spouse) is on your health insurance. Small wonder, given this is only one benefit marrieds get, that some long term partners might want to get married.

  6. 6
    John Says:

    The idea is that some highly paid people are getting “Cadillac” health plans in lieu of a larger salary. Since there is no tax on a health plan, the employee can receive extra benefits from the health coverage and no taxes are paid on these extra benefits.

    By taxing the high-end health plans, Congress gets their cut either by the “Cadillac” health plan tax or by forcing employers to divert the extra cost of health coverage to taxable compensation. The other goal is to make everyone’s insurance virtually the same so that people with more money or better jobs can’t get better quality care.

  7. 7
    Darwin's Money Says:

    The administration didn’t do a very good job of articulating the simple notion that it’s only 40% OVER the limit, and employers aren’t volunteering what a health plan is valued at now (I’m curious). But in reality, even with a great plan valued at say, 30K, you’d be taxed at 1K – not too onerous I guess.

    What also isn’t obvious though is that this is a giant sham being financed with other taxes upfront while no services are provided early on to make it appear revenue neutral over the first 10 years. So, past 10 years, it totally blows up and wrecks the US like what the EU is seeing now…but we’ll worry about that later. They’re restricting FSA/HSA eligibility, reducing limits, using IRS revenues to fund it, etc. Giant sham, but so few people care or know how scammy this is that it will be many years before Americans look back on this legislation shaking their heads.

  8. 8
    Robin Hutchison Says:

    I have Kaiser coverage through my employer. Mine is a family coverage fully paid by my employer. Others at work depending on their position may or may not have family coverage but instead individual coverage. How will the IRS determine if a coverage is family (allowing 27000 or so a year) or individual (allowing 10000 or so a year)? And also what is family coverage? Is employee and spouse family coverage or must there be children? Please clear this up for me. Thank you

  9. 9
    ken sidley Says:

    Our “friends” in Washington,(Congress) have recognized the health care plan as another revenue stream. Watch, they WILL find a way to tax medical insurance as income so they can create more jobs for incompetents in government. Remember the health care bill has been, is, and will be one of the biggest shams on the American people.

  10. 10
    Harry Says:

    The indexing wasn’t “insight”, it was a ruse.

    First, the CPI is based on whatever isn’t “volatile”, like food and energy, which are now EXCLUDED from the CPI calculation.

    Second, health care costs have been rising at about CPI +12%, and are continuing to do so. Combine that with all the coverage REQUIRED for “qualifying” plans, and the adjustments to those requirements that can be made administratively by Sebelius, and I’d be very surprised if 80% of the plans don’t qualify as “Cadillac”.

  11. 11
    Logan Says:

    I got here because a thought occurred to me that I received over $43K in health insurance benefits. 2012 is the first year I’ve had insurance in over 10 years, I got in on the Pre-existing Condition Insurance Program (PCIP). I’ve spent about $11K out of pocket, so theoretically that might be considered $32K “profit”?

    I don’t know why people consider $11K “affordable”, I’ve seen the 1000% markup on drugs the so-called not for profit hospitals charge, and doctors who charge over $400 for a 20 minute office visit.

    I don’t know if I can really afford Healthcare at $11k/yr. If I have to pay taxes on the benefits I know I can’t and will opt to pay the tax/fine instead. :P

  12. 12
    amazon.com Says:

    It’s difficult to find knowledgeable people in this particular subject, however, you sound like you know what you’re talking about!
    Thanks

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