Insurance premiums are the amount of money our employer or we pay to insurance companies for coverage. Whether or not employer-paid insurance premiums are considered taxable income by the IRS depends on the type of insurance, the amount of coverage, your role in the company and your salary.
Insurance Premiums May Be Taxable
The premiums paid by the employer in a business life insurance policy are tax exempt if the death benefit of the policy is $50,000 or less. If your employer pays for a life insurance policy for you that has a death benefit over $50,000, the amount of the premium that goes toward the extra coverage is subject to payroll taxes. That means your employer has to report the cost of the extra benefit as income and withhold payroll taxes from it. When it comes time to file your tax return, you’ll be reporting this as income.
Insurance Premium Exceptions
Health and accident insurance premiums paid by your company are exempt from federal and other payroll taxes. One exception is premiums for long-term care insurance provided in a tax-sheltered plan, such as a flexible spending account. This type of insurance covers costs associated with assisted living facilities or residential care for the disabled. The cost of it is subject to income tax but not Social Security or Medicare taxes.
Additionally, health insurance premiums that you pay are considered a medical expense. As such, they may be tax deductible. Include what you’ve paid out-of-pocket for health insurance premiums in your medical expenses for the year. If your medical expenses total more than 7.5 percent of your adjusted gross income they’re deductible. The 7.5 percent applies to tax years 2017 and 2018. Starting with the 2019 tax year, it goes up to 10 percent of your adjusted gross income. Don’t forget that your mileage to and from medical appointments is considered a medical expense.
If the company is an S corporation, employees who own more than 2 percent of the company’s stock are considered partners and their company-paid insurance premiums will be subject to income tax. However, this benefit is not subject to Social Security or Medicare taxes unless the company compensated the employee for a specific illness or injury.
Company-paid premiums for plans that favor highly compensated employees or key employees are also taxable. Eligibility to participate, the amount of contributions, or extent of benefits are all ways that a plan might favor certain individuals. The company must include the value of the benefits the employee could have selected in their wages.
The IRS’s definition of a highly compensated employee is an officer of the company, a shareholder who owns more than 5% of the voting power or value of the company's stock, an employee who is highly compensated “based on the facts and circumstances.” A spouse or dependent of any of these persons is also considered a highly compensated employee. A key employee is an officer of the company whose annual pay is more than $175,000, or a 5% owner, or a 1% owner whose annual pay is more than $150,000.
Tax Year 2018 Information
For the 2018 tax year, there are currently no changes in the rules governing taxable and non-taxable insurance premiums. As of this writing, the IRS’s “Publication 525, Taxable and Nontaxable Income for use in preparing 2017 Returns” has not been updated. However, a related deduction has changed. The standard mileage rate for using your vehicle to obtain medical care has been increased by 1 cent to 18 cents per mile. Also, the annual maximum you can contribute to a health care flexible spending account went up $50 to $2,650 for 2018.
Tax Year 2017 Information
You may encounter conflicting information about the IRS’s adjusted gross income threshold for medical expenses for 2017 and 2018. Some sources say it’s 10 percent of your adjusted gross income, others say it’s 7.5 percent. It’s definitely 7.5 percent for these two years. The reason for the conflicting information is that it had gone up to 10 percent for a while but the Tax Reform and Jobs Act of 2017, which went into effect Dec. 22, 2017, changed the Adjusted Gross Income threshold back to 7.5 percent retroactive to 2017. The IRS’s own Publication 502 says 10 percent because it was published before the percentage was reinstated to 7.5. It will go up to 10 percent starting in 2019.
The standard mileage rate for the using your vehicle to get to and from medical appointments in 2017 is 17 cents a mile, down from 2016’s 19 cents per mile. The health care flexible spending account maximum was $2,600 for 2017.
Reimbursement of Cobra Premiums Taxable?
If your former employer is reimbursing you for your COBRA payments, this may or may not be considered taxable income. They may report it on your W2 in Box 12 with the code DD which means the amount in the box is the total of what you and your employer paid for your employer-sponsored health insurance for the year. However, amounts coded DD don’t affect the other numbers on your tax return. They’re for informational purposes only. But sometimes an employer will issue a Form 1099-MISC for the COBRA reimbursements. In this case it would have to be reported as income. It’s a good idea to talk to your former employer’s human resources people to find out how they’re going to handle the reimbursement and then talk to a professional tax preparer.
In general, if your company wants to treat this as a non taxable health insurance expenditure, it should either make the COBRA payments directly to COBRA or reimburse you only after you show them proof of making the payments yourself. COBRA reimbursements are not taxable if you’re required to prove to your former employer that you made the COBRA payments before they reimburse you. You should keep documentation of any arrangement you have with your former employer and for each COBRA payment you’ve made and each reimbursement you received.
If your former employer is making the payments directly to COBRA for you, the exemption for employer-paid accident and health insurance premiums applies. It’s not considered income and should not be reported as taxable wages, provided the plan covered by the COBRA payments is a “qualified plan.” See IRS Section 4980B(g) for details. There are no conditions on this continuation of coverage. The employer should exempt the premiums whether the employee quit or was temporarily laid off, or whether he was a permanent or temporary worker. If you’re paying your own COBRA premiums with out of pocket funds, you can add what you paid to your medical expenses for the tax year.
- Ameriprise: Tax Planning Tips: Life Insurance
- IRS: Publication 15-B: Employer's Tax Guide to Fringe Benefits 2017
- ABD Insurance and Financial Services: COBRA SUBSIDIES AND REIMBURSEMENT
- Bogleheads.org: Reimbursement for COBRA considered taxable income?
- IRS.gov: About Publication 15-B, Employer’s Tax Guide to Fringe Benefits 2018
- IRS.gov: AGI Threshold for Medical Expenses Restored to 7.5%
- IRS.gov: Employee Benefits
- IRS.gov: Group-Term Life Insurance
- IRS.gov: Plan now to Use Health Flexible Spending Arrangements in 2017
- IRS.gov: Plan now to Use Health Flexible Spending Arrangements in 2018
- IRS.gov: Topic Number 502 - Medical and Dental Expenses
- Creatas Images/Creatas/Getty Images