Beginning January 1, 2013, employers were required to report the total value of certain employer sponsored health benefits on their employee’s W2. While the IRS has confirmed that the information reported in 2013 for the fiscal year 2012 is not taxable, the law itself does not specify that such benefits would not be subject to tax at some future date. In fact, beginning in 2018, if the plan your company provides is a “Cadillac” plan, it will be taxed. This means that if your company provides an expensive benefit plan for its employees, you will be taxed on the benefits you receive. Until then, the law says only that the benefits are reportable and does not specifically state that employer sponsored health benefits should not be subject to tax.
This is scary!
In 2012, the average annual corporate sponsored health insurance premium for family coverage was $15,745, approximately $1300 per month. This means that if you are an employee earning $30,000 per year, instead of having a W2 that shows income of $30,000, if not done properly, your W2 will show taxable income of $45,745. Not only does your tax bracket go up but you are not getting any additional cash with which to pay the tax on the extra $15,745 dollars of reported income. Remember, in addition to income tax, social security, disability, and state income taxes could also be assessed.
The important thing to understand is that IRS confirmation that these benefits will not be taxed does not have the full force and effect of a law. The statement only serves as an opinion about their current intent as to whether or not they intend to assess taxes on these reported benefits NOW. Until the issue is adjudicated or until the legislature confirms that these benefits are not taxable, the IRS can always change its mind. As the deficit grows and the government is looking for additional sources of revenue, will taxation of these benefits be next?
For 2013, benefits not properly reported on an employee’s W2 may be subject to tax. In order to be exempt from taxation, the employer must report the employer’s sponsored health benefits in a special informational category on the W2. It must be reported on Form W-2 in box 12 using the code DD. If the benefits are not reported as specifically stated, then they can be considered income and be taxable. Please check when you get your W-2 to confirm that these benefits are properly reported.