The Tax Exclusion for Employer-Sponsored Insurance Is Not Regressive-But What Is It?

If a common law employer uses a third-party to file, report, and pay employment taxes, different rules will apply depending on the type of third-party payer the common law employer uses for claiming/reporting the sick and family leave credits. In general, people who anticipate needing health care services are more likely to buy health insurance than otherwise similar people who do not need such services—a phenomenon often referred to as adverse selection. CBO and JCT expect that this option would, to a limited extent, increase the extent of adverse selection in employment-based insurance relative to current law. Specifically, healthier workers would be more likely than less healthy workers to forgo that coverage because of the higher costs and lower benefits under the option. The effects of that increase would probably be small over the 2026–2032 period because most workers would continue to enroll in employment-based health insurance if it was offered.

The employer must have a “plan” in writing that stipulates the employer will provide health coverage by reimbursing its employees for all or part of medical expenses or the cost of coverage purchased directly by the employees. Employers should obtain documentation of the medical services before reimbursing the employee. The client employer is responsible for avoiding a “double benefit” with respect to the sick and family leave credits and the credit under section 45S of the Internal Revenue Code. The client employer cannot use wages that were used to claim the sick and family leave credits, and reported by the third-party payer on the client employer’s behalf, to claim the section 45S of the Code credit on its income tax return. In some cases, a common law employer may use the services of a third-party payer (such as a CPEO, PEO, or other section 3504 agent) to pay wages for only a portion of its workforce. In those circumstances, the third-party payer files a federal employment tax return for the wages it paid to the common law employer’s employees under its name and EIN , and the common law employer files a federal employment tax return for wages it paid directly to employees under its own name and EIN.

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Limit the Income and Payroll Tax Exclusion to the 50th Percentile of Premiums. The first alternative would impose a limit on the extent to which employers’ and employees’ contributions for health insurance premiums—and to FSAs, HRAs, and HSAs—could be excluded from income and payroll taxation. Those limits would be based on the 50th percentile of employment-based health insurance premiums in 2024, meaning that 50 percent of all premiums https://turbo-tax.org/how-does-the-tax-exclusion-for-employer/ for single and family coverage would be below those respective amounts in that year. To set the tax exclusion limits in 2026 and later years, those 2024 premium percentiles would be indexed for inflation using the chained consumer price index for all urban consumers (chained CPI-U), one measure of overall price inflation. The same limits would apply to the deduction for health insurance available to self-employed people.

That lost revenue is more than enough to cover the cost of providing health insurance to the 42 million people who were uninsured in 2013. Whereas the progressive tax rates mean that wealthier households receive a higher-valued reduction in their tax bill, the Social Security limit works the other way providing relief only to households with incomes less than the $110,100 limit. The exclusion for individual coverage is based on language in the House and Senate reports on the legislation. Individual coverage still had to be provided through plans. Self-employed individuals include sole proprietors, general partners in a partnership, limited partners who receive guaranteed payments, and individuals who receive wages from S-corporations in which they are more than 2% shareholders. The current exclusion avoids all of these technical issues; everything is just left out of the tax calculations.

Credits & Deductions

Those strategies would potentially reduce the income of health care providers, which could reduce the supply of care. By subsidizing employment-based health insurance, the tax exclusion encourages firms to offer a more generous benefit package to recruit and retain employees. The exclusion also encourages workers to enroll in employment-based insurance rather than other types of insurance, such as that obtained through the nongroup market.

However, in the longer term, as the value of the tax exclusion was more substantially reduced under this option, further reductions in enrollment by healthier workers might lead to more substantial increases in premiums and larger decreases in enrollment. Lawmakers would also need to decide whether to subject the contributions to income taxation, payroll taxation, or both. On average, workers enrolled in employment-based plans face higher federal income tax rates than payroll tax rates.

The Tax Policy Center’s

In addition, see 5 CFR 1605, Correction of Administrative Errors, and 5 U.S.C.
8432a, Payment of Lost Earnings. An employee may present a claim for retroactive
correction of an act or omission by the employing agency that was not in
accordance with applicable statutes, regulations or administrative procedures. If an employee has a TSP loan, information about the
loan is included on the employee’s TSP Participant https://turbo-tax.org/ Statement, rather than on a
separate quarterly loan statement. (4)  The employee may request cancellation of coverage
at anytime by completing Form SF-2809. Employees are alerted that change in residence or
assignment may require the filing of a new state income tax certificate. (1)  U.S. citizen employees who have continuously
performed service since December 31, 1983, covered by the CSRS or the FSRDS.

That means you deduct the cost of the premium from the employee’s paycheck before state and federal taxes are calculated and deducted. This increases the employee’s take-home pay and lowers the amount of the employee’s taxable income. In the area of employer-provided health insurance coverage (which is a fringe benefit), the value of health insurance benefits for a child of an employee is excluded from gross income where the child is a dependent under the rules of IRC section 106. However, for federal income tax purposes, the value of health insurance benefits for a child of an employee is treated as imputed income in cases where the child does not qualify as a dependent under IRC section 106. This can happen, for example, when the child is over age 24 or is emancipated.

The marginal tax rate is the rate that applies to the last dollar of income received by a taxpayer. Often it is the same as the statutory tax rate that applies to the highest band of taxable income for the taxpayer. For married couples filing joint returns for 2008, the statutory tax rate for taxable incomes not exceeding $16,050 is 10%, whereas the rate for taxable incomes over $357,700 is 35%. An exclusion reduces the income that is taxed at the highest rate; thus the tax savings on an exclusion of $1,000 generally would be $100 (i.e., $1,000 x .10) for someone in the lowest tax bracket and $350 (i.e., $1,000 x .35) for someone in the highest bracket. At the same time, the historical argument about the importance of tax and regulatory policies may be overstated.

• This subchapter is applicable to U.S. citizen employees
  and locally employed staff (LE staff).
• See Publication 15-B, Employers’ Tax Guide to Fringe BenefitsPDF, for more information.
• In the non-group market, by contrast, insurers worry that those seeking coverage may be high-risk individuals.
• The author notes, however, that his findings “must be interpreted with considerable caution, as they are using the price elasticity estimated from existing variations in the tax price to estimate the impact of a much more radical change in policy.”
• It applies to benefits for their spouse or dependents as well.

Under the federal income tax system, the percentage of income that is taxed increases for each portion of income that exceeds predefined thresholds. Table 3 shows the federal income tax rates for married families filing jointly in 2012. Under the schedule, a family with $75,000 of taxable income7 would pay a tax equal to 10% of the first $17,400 of income (or $1,740), 15% of their next $53,300 of income (or $7,995) and 25% of the last $4,300 of income (or $1,075), for a total tax payment of $10,810. What this means for the tax exclusion for premium payments is that the value of the exclusion grows as income increases. For example, a family with $75,000 of taxable income would save $0.25 in federal income tax for each dollar reduction in their taxable income, but a family with $50,000 in taxable income would save only $0.15 in federal taxes for each dollar reduction in taxable income.

However, if fewer workers than anticipated declined coverage under the option, the deficit reduction would be smaller because, for workers enrolling in employment-based insurance, the premium amount above the threshold would be taxed. This option would limit the exclusion of employment-based health insurance from taxation, thereby increasing tax revenues and reducing federal deficits. That approach would largely preserve the current-law structure that gives preferential tax treatment to employment-based coverage.

[2 ]If a child of a taxpayer is a “qualifying child,” there will be no imputed income resulting from employer-provided health insurance coverage. This TIR focuses on the instances where a child of a taxpayer who is not a “qualifying child” may be a “qualifying relative.” Whether such children meet the requirements of “qualifying relative” is the determining factor as to whether the employee is charged with imputed income. Recent legislation provides for the exclusion from Massachusetts gross income of any imputed income resulting from employer-provided health insurance of a person included in the employee’s family health insurance plan where the coverage is required by state law. Section 61(a)(1) of the Code states that, except as otherwise provided, gross income includes compensation for services, including fees, commissions, fringe benefits, and similar items. A fringe benefit is any property or service that an employee receives in lieu of or in addition to regular taxable wages. The extent to which a particular fringe benefit is excluded from gross income depends on the Code provisions that apply to the benefit.