Employer paid health insurance premiums are a tax-free fringe benefit.
Having an employer who pays for your health insurance is a great benefit to employees. If you have to purchase health insurance privately, it will cost you much more. However, while representing a financial benefit to you, employer-paid health insurance is treated as tax-free income to employees no matter how premium the plan is.
Not Income
The premiums that your employer pays on your behalf, while saving you money, are not considered income. You do not have to report any employer-paid premiums for you, your spouse and dependents on your taxes. This extends to whether the premiums paid were for group insurance or an individual policy or were paid when you were laid off.
Employee-Paid Premiums
If you must pay your own health insurance premiums and then be reimbursed by your employer, the cost of the premium is not considered taxable income. However, the reimbursement must be specifically for health insurance. If your employer pays you a lump sum that is intended for health insurance but not required to be spent that way, then the lump sum must be reported as income. Also, if the health insurance plan reimburses you money for medical care, you do not have to report that income.
Deductibility
Although the amount you pay for health insurance premiums is technically deductible, it is sometimes hard to reach the threshold point where you can take the deduction. You can include health insurance premiums among the health care costs that are deductible if you itemize your deductions on Schedule A. However, you can only deduct the amount of your health care costs that is above 7.5 percent of your adjusted gross income.
Self-Employment
Self-employed workers have it a bit easier. A self-employed person is able to deduct all of his health insurance costs for himself, his spouse and their dependents. The deduction is made directly from the self-employment income without having to either itemize deductions or reach the 7.5 percent threshold. The health insurance deduction can't exceed the worker's earned income.
W-2s
Beginning in 2011, employers were encouraged to start reporting the value of an employee's health benefits on W-2 statements. This came about as part of the new national health care law. Though the amount is included on your earnings statement, it is still not considered income. The amount listed is for your own personal information.
