Contributions (or premiums) you pay under a group insurance plan for the coverage that an employee receives during the year because of their office or employment (past, present or future) constitute a taxable benefit for the employee. However, contributions for coverage of
total or partial loss of income from an office or employment that you pay to a group insurance plan (if wage loss benefits are payable periodically) or to an employee life and health trust do not constitute a taxable benefit for the employee. The type of plan and the coverage provided to the employee determine the value of the benefit. To calculate the value of the benefit, see the following pages: Include the value of the benefit in boxes A and J of the employee's RL-1 slip (see courtesy translation
RL-1-T) if the coverage is under a private health services plan and in boxes A and L if the coverage is under any other type of plan. You may also have to include the value of the benefit in box G of the RL-1 slip (see the
Benefit Provided to an Employee page). The value of the taxable benefit calculated over the course of the year is based on estimates and must be apportioned over all the pay periods in the year. You
can do the calculation using any reasonable estimation method (such as basing the estimates on data for the previous year or on a hypothetical premium). At the end of the year, you have to use the actual data to determine the actual value of the benefit to be entered on the employee's RL-1 slip. End of note
Contributions (or premiums) you pay under a private health services plan for coverage that the surviving spouse or the dependants of a deceased employee receive do not constitute a taxable benefit.
Contributions (or premiums) paid by a current, former or retired employee to a private health services plan that covers, for example, medical or dental costs, do not constitute a taxable benefit for the employee. However, the contributions (or premiums) paid may entitle the employee to claim a tax credit for medical expenses in their income tax return. To report the amounts that the employee paid to such a plan on the RL-1 slip (see courtesy
translation RL-1-T), enter “235” in a blank box, followed by the amount. If you do not enter the amount on the RL-1 slip, the employee may ask you for supporting documents. Do not include this amount in box A. Employer-paid premiums for health insurance are exempt from federal income and payroll taxes. Additionally, the portion of premiums employees pay is typically excluded from taxable income. The exclusion of premiums lowers most workers’ tax bills and thus reduces their after-tax cost of coverage. This tax subsidy partly explains why most American families have health insurance coverage through employers. Other factors play a role though, notably the economies of group coverage. ESI Exclusion is worth more to taxpayers in higher tax bracketsBecause the exclusion of premiums for employer-sponsored insurance (ESI) reduces taxable income, it is worth more to taxpayers in higher tax brackets than to those in lower brackets. Consider a worker in the 12 percent income-tax bracket who also faces a payroll tax of 15.3 percent (7.65 percent paid by the employer and 7.65 percent paid by the employee). If his employer-paid insurance premium is $1,000, his taxes are $254 less than they would be if the $1,000 were paid as taxable compensation. His after-tax cost of health insurance is thus $1,000 minus $254, or $746. In contrast, the after-tax cost of a $1,000 premium for a worker in the 22 percent income-tax bracket is just $653 ($1,000 minus $347). Savings on state and local income taxes typically lower the after-tax cost of health insurance even more. These examples assume that workers bear the full burden of employer payroll taxes. Note that the effective marginal tax rates (25.4 percent for the worker in the 12 percent income-tax bracket and 34.6 percent for the worker in the 22 percent income-tax bracket) are less than the sum of the income-tax and payroll-tax rates (27.3 percent and 37.3 percent, respectively) because those rates are applied to compensation after the employer’s share of payroll taxes has been deducted. Thus, for example, if the employer increases compensation by $1,000, cash wages only increase by $929 [calculated as $1,000 / (1 + employer payroll tax rate)], because the employer would have to pay additional employer payroll taxes of $71. The lower-wage worker’s resulting combined income and payroll tax would be 27.3 percent of $929, or $254. The higher-wage worker’s resulting combined income and payroll tax would be 37.3 percent of $929, or $347. The example assumes the higher-wage worker has earnings below the maximum amount subject to Social Security taxes. ESI Exclusion is costlyThe ESI exclusion will cost the federal government an estimated $273 billion in income and payroll taxes in 2019, making it the single largest tax expenditure. Note, too, that the open-ended nature of the tax subsidy has likely increased health care costs by encouraging the purchase of more comprehensive health insurance policies with lower cost sharing or with less tightly managed care. Replacing the ESI exclusion with a tax credit would equalize tax benefits across taxpayers in different tax brackets, as well as between those who get their insurance through their employers and those who obtain coverage from other sources. Making the credit refundable would extend that benefit to those whose tax liability falls below the value of the credit. And designing the credit so that it does not subsidize insurance on the margin (i.e., to be a fixed dollar amount as opposed to a percentage of the premium) could lower health care costs. Further Reading Burman, Leonard E., and Jonathan Gruber. 2005. “Tax Credits for Health Insurance.” Tax Policy Center Issues and Options Brief 11. Washington, DC: Urban-Brookings Tax Policy Center. Burman, Leonard E., Jason Furman, Greg Leiserson, and Roberton Williams. 2007. “The President’s Proposed Standard Deduction for Health Insurance: An Evaluation.” Washington, DC: Urban-Brookings Tax Policy Center. Gruber, Jonathan. 2011. “The Tax Exclusion for Employer-Sponsored Health Insurance.” National Tax Journal 64 (2, part 2): 511–30. Joint Committee on Taxation. 2020. “Estimates of Federal Tax Expenditures for Fiscal Years 2019–2023.” JCX-55-19. Washington, DC: Joint Committee on Taxation. Which policy has benefits that are considered taxable quizlet?Employer-paid premiums for a group disability income policy are tax-deductible to the employer as a business expense; therefore, benefits are taxable to the employees. The correct answer is: They are taxable.
Under what condition or group disability income benefits are received by an employee not taxable as income?If you pay the entire cost of a health or accident insurance plan, don't include any amounts you receive for your disability as income on your tax return.
Which of the following determines whether disability insurance benefits are taxed?Whether disability insurance benefits are taxable depends on the type of benefits you receive, whether the premiums were paid with pre-tax or after-tax dollars, and who paid the premiums.
Under which conditions are employee group medical benefits exempt?Under which condition would an employee's group medical benefits be exempt from income taxes? An employee's group medical benefits are generally exempt from taxation as income.
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Under which of the following employer provided plans are the benefits taxable to an employee
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