3.1 Tax-Free Health and Accident Coverage Under Employer Plans

You are not taxed on contributions or insurance premiums your employer makes to a health, hospitalization, or accident plan to cover you, your spouse, your dependents, and your children under age 27 whether or not they can be claimed as your dependents. If you obtain coverage by making pre-tax salary-reduction contributions under your employer’s cafeteria plan (3.14), the salary reductions are treated as employer contributions that are tax free to you. If you are temporarily laid off and continue to receive health coverage, the employer’s contributions during this layoff period are tax free. If you are retired, you do not pay tax on insurance paid by your former employer. Medical coverage provided to the family of a deceased employee is tax free since it is treated as a continuation of the employee’s fringe-benefit package. If you are age 65 or older, Medicare premiums paid by your employer are not taxed. If you retire and have the option of receiving continued coverage under the medical plan or a lump-sum payment covering unused accumulated sick leave instead of coverage, the lump-sum amount is reported as income at the time you have the option to receive it. If you elect continued coverage, the amount reported as income may be deductible as medical insurance if you itemize deductions (17.5).

If your employer provides health and accident coverage to your live-in companion who is not recognized as your “spouse” under state law or as your “dependent” (even if support and household membership tests in Chapter 21 are met) because the relationship violates local law, you are taxed on the value of the coverage in excess of what you paid (on an after-tax basis) for it. Furthermore, under the 1996 Defense of Marriage Act (DOMA), a gay or lesbian partner is not recognized as a spouse for federal tax purposes, regardless of whether state law recognizes same-sex marriage. However, the First Circuit appeals court has held that DOMA’s denial of federal tax benefits to same sex couples is unconstitutional; an appeal of the case to the Supreme Court is expected.

Disability coverage.

If your employer pays the premiums for your disability coverage (short term or long term) and does not report the payment as compensation income on your Form W-2, or if you pay the premiums with pre-tax salary-reduction contributions, your coverage is tax free but any benefits you subsequently receive from the plan upon becoming disabled will be includible in your gross income (3.3). If you pay the premiums with after-tax contributions or your employer makes contributions that are included on your Form W-2, any disability benefits you receive from the plan will not be taxable to you.

Health Reimbursement Arrangements (HRAs).

Employer contributions to health reimbursement arrangements (HRAs) are not taxed to the employees. The contributions must be paid by the employer and not provided by salary reduction. HRA contributions can be used to reimburse the medical costs of employees, their spouses, and their dependents, and unused expenses may be carried forward to later years (3.3).

Long-term care coverage.

You are not taxed on contributions your employer makes for long-term care coverage that would pay you benefits in the event you become chronically ill (17.15). However, long-term care coverage may not be offered to you through a cafeteria plan (3.15) and reimbursements of long-term care expenses may not be made through a flexible spending arrangement (3.16).

Continuing coverage for group health plans (COBRA coverage).

Employers are subject to daily penalties unless they offer continuing group health and accident coverage to employees who leave the company voluntarily or involuntarily (unless for gross misconduct) and to spouses and dependent children who would lose coverage in the case of divorce or the death of the employee. Federal COBRA continuing coverage rules apply to employers with 20 or more employees but smaller employers may be required under state law to provide comparable continuing coverage under “mini-COBRA” laws.

Generally, an employer may charge you premiums for continuing coverage that are as much as 102% of the regular plan premium for the applicable (family or individual) coverage.