Federal Tax Considerations for Health Insurance

Taxation of Non-Governmental Plans/Individually-Owned Accident, Health, and Disability Policies

1. Premiums are generally not income tax-deductible 2. any medical expenses including premiums that exceed 10% if the individual's adjusted gross income are income tax-deductible 3. Benefits received are NOT subject to income tax

Individual Disability Plans

1. Premiums are not tax-deductible 2. Benefits are not subject to income tax as long as the benefits received by the employee do not exceed actual costs, and they are a maximum of up to 60% of the individual's income

Taxation of LTC Policies

1. Tax-qualified policy, in which the policy can be eligible for a tax deduction the premiums and benefits paid 2. Non-tax-qualified policy in which benefits may or may not be taxed even if they exceed the cost of care and/or cover expenses that are not qualified LTC expenses.

Group Accident, Health, Dental Insurance, LTC, and AD&D Plans

1. premiums are tax-deductible by the employer as a business expense 2. employees are not taxed on received benefits, unless benefits exceed actual expenses.

Short & Long Term Group Disability

1. premiums paid by the employer are income tax-deductible by the employer as a business expense. Employees are taxed on benefits received from such an arrangement. 2. Any portion of premiums paid by the employee is not tax-deductible, and employees are not taxed on benefits in proportion to the premium paid by the employee.

Group Disability Plans

1. premiums paid by the employer are tax-deductible to the employer. Benefits are subject to income tax and are for the actual income of the employees 2. Premiums paid by the employee are not tax-deductible. Benefits are not subject to income tax and the benefit amount can subsequently be up to a maximum of 60%

Taxation of Medical Expense Coverage for Sole Proprietors, Partners, and Limited Liability Corporations

1. sole proprietors must generally obtain health coverage through independent individual policies; if so, then premiums for medical insurance coverage are deductible along with all expenses for medical expenses-anything that exceeds 10% of the adjusted gross income is deductible.

Tax Treatment of Premiums and Insurance Proceeds

The taxation of benefits on disability and medical policies is greatly determined by how premiums are treated. If the individual receiving benefits was able to and DID DEDUCT premium payments from his taxable income, the benefits WILL be taxed. If the premiums were NOT DEDUCTED, the benefits are NOT taxed.

Key person Disability insurance and Business Disability Buy Out or Buy-Sell Insurance

these policies are owned by the business/business owner. The premiums are not Tax-Deductible. The benefits received are not taxed

Consumer Driven Plans

CDHPs include a tax-exempt health account that participants use to pay for health expenses up to a certain amount.

Health Savings Accounts

Contributions to HSAs by: 1. individuals-are deductible 2. an employer-are not included in the individuals taxable income . 3. the interest and investment earning generated by the account are also not taxable while in the HSA 4. Amounts distributed are no taxable as long as they are used to pay for qualified medical expenses.

Medical Savings Accounts

MSAs are tax-exempt accounts set up with a bank or insurer. 1. Distributions for qualified medical expenses are tax-free 2. if funds are used for non-qualified medical expenses, they may have a 20% tax 3. interest is Tax-free

Tax Provisions of Social Security

Taxes: 1. Current tax rate of 7.65% is deducted from an employee's gross wages up to a certain cap and is not deductible for income tax purposes. 2. Employers pay a matching tax on the employee's behalf that is income tax-deductible for the employers as a cost of doing business 3. Self-employed individuals must pay 100% of the Social Security tax, only half of which is income tax-deductible; the portion that the employer would pay. Benefits: usually tax-free, but may be taxed as income if the person receiving benefits has substantial income from other sources.

Disability Benefits Subject for FICA

When the premium for the disability policy is paid by the employer, the benefits received are considered as wages for the first six months, will be included on the employee's W-2 form, and are subject to Federal Insurance Contributions Act taxes. The employee's portion of the FICA tax will be deducted from the disability payment by the insurance company. It is the employer's responsibility to match this amount. After the employee has been disabled for six months, their benefit is no longer subject to FICA tax. This does not change the taxability f the disability benefit for income tax purposes.

Health Reimbursement Accounts

employers reimburse employee for claims as they occur. Reimbursement of qualified claims are tax-deductible for the employer. Reimbursements claims by the employee are tax-free up to a yearly maximum limit, provided they are tied to qualified health care expenses.