Do Employees Need to Pay Taxes on Health Insurance Premium Reimbursements?
In most cases, employees do not pay taxes on reimbursements received from employers for health insurance premiums. However, in some cases, a reimbursement may be considered taxable, depending on the nature of the reimbursement or for certain S corporation employees. When premium reimbursements are not considered taxable, the treatment is also extended to other expenses and people covered by the insurance plan.
In general, the IRS does not classify employer-paid health insurance as taxable wages or as a benefit taxable to the employee. However, this rule applies only to traditional insurance premium payments in which the plan is paid either with the employee’s own funds, or through direct payments from the employer. If the plan is paid or reimbursed with funds in an alternative fashion, then the reimbursement could be considered taxable.
Spouse and Dependent Coverage
Payments made to an employee under the regular reimbursement rules also extend to premiums paid to cover an employee’s spouse and dependents, which means no portion of a regular premium reimbursement is considered wages, regardless of who is covered by the policy. In addition to regular health insurance, reimbursements for long-term care premiums and other medical expenses are also excluded from wages.
Health Savings Account Contributions
Contributions you make to a health savings account are taxable, even if you use the money in the account to pay for private insurance premiums. If an employer reimburses you for health insurance premiums and the funds are placed in an HSA account, the reimbursement is considered a contribution made by you and is subject to income, Social Security and Medicare taxes. In this instance, your employer includes the reimbursements in your gross W-2 income and withholds taxes accordingly. An exception to this rule applies when you fund the HSA with qualified cafeteria plan funds, which are not subject to tax.
S Corporation Employees
Regular rules for health insurance reimbursements also do not apply to certain S corporation employee-shareholders. If an employee-shareholder who owns more than 2 percent of the S corporation receives reimbursements for health insurance premiums, the reimbursements are considered taxable wages. Reimbursements for these employees are included in gross wages and are also subject to income, Social Security and Medicare taxes. Shareholder ownership is determined by the percentage of S corporation stock held by the employee.
With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.