The Affordable Care Act (ACA), more commonly known as Obamacare, revolutionized healthcare in America. It provides affordable options allowing everyone to enjoy health insurance coverage. It also mandates that every U.S. citizen maintains minimum coverage or face penalties. In other words, it makes every citizen responsible for maintaining health but provides a means to do so.
The employer mandate was also included in the law. Now fully in effect, this mandate states that employers with 50 or more full-time employees (FTE) must offer employer-sponsored health coverage meeting mandatory minimum standards of at least 95% of FTEs and dependents. A failure to do so results in penalties for every employee not insured. Penalties will increase in 2017.
Employers offer benefits such as employer-sponsored health plans, stock options, annual bonuses, paid vacation days, health club memberships, and company cars. This has always been a way for employers to supplement salaries and remain competitive in their hiring practices. Naturally, employees also enjoy these benefits.
However, employees will find that some portions of the benefits package are taxable. Does the health insurance an employer pays for fall into this category?
Health Insurance is Not Wages
Anything considered part of an employee’s wages is subject to taxation by the IRS, along with withholding for social security, Medicare, and so on. Health insurance and medical payments made by an employer do not fall under this category.
The confusion about whether health insurance benefits provided by an employer are subject to taxation has something to do with including these benefits on W-2 forms. Consider, however, the pre-tax dollars contributed to 401K plans, both by employees and through employer matching funds.
These are also listed on a W-2. They are not subject to taxation. Neither are your health benefits, even though they appear on tax documents. There is some speculation that including health benefits on tax documents intend to facilitate eventual taxation. The more likely reason is so that the government can track health benefits for purpose of determining future laws, such as the implementation of the Cadillac Tax.
Originally set to take effect in 2020, the Cadillac tax received a 2-year delay from Congress and the President in 2015, and then repealed completely by the Trump administration in 2019. The tax would have imposed a 40% excise tax on high-cost, employer-sponsored health plans that exceed predetermined annual thresholds of $10,200 for individual plans or $27,500 for families.
Although employer-sponsored health coverage is not subject to taxation, the money you put into a flexible spending account (FSA) for medical purposes could be. As of 2022 the FSA contribution limit is set at $2,850. Generally, the money placed in a FSA is pre-tax dollars, however any amount over the limit is subject to taxation as part of your regular income.