Imputed Income

With the rising cost of providing healthcare insurance, more and more employers are sharing that cost with their workers. As a general rule, a worker's contribution to healthcare coverage is considered taxable unless the employer sets up the company plan under Section 125 of the federal tax code. Presently, about 80 percent of employers that offer health insurance do so under the Section 125 provision.

Section 125 arrangements include premium only plans and flexible benefit (cafeteria) plans, which can include flexible spending accounts (FSA). An FSA is funded with pre-tax wages to be used for qualified expenses, such as dependent care assistance, adoption assistance, and medical care reimbursements.

This type of payment arrangement enables workers to use tax-free income to pay for benefits. Wages deducted used to pay premiums or contribute to qualified savings accounts are not calculated in the worker's total income for the purposes of federal income tax, state income tax, and Federal Insurance Contributions Act (FICA) taxes. FICA taxes are those levied for Social Security and Medicare.

Patient Protection and Affordable Care Act
Employers also are able to deduct their share of worker healthcare costs, thereby making the cost of providing healthcare insurance tax free. However, the Patient Protection and Affordable Care Act (PPACA) requires that employers report the cost of providing major medical benefits to each individual worker on his or her W-2 form. While this practice enables workers to understand the true value of the benefit, the amount is not subject to taxes.

Because a provision of the PPACA permits adult children under age 27 to remain on a parent's health insurance plan, the Act also changed the federal income tax law to exclude the value of this medical coverage from the parent's taxable income, even for children who does not qualify as a dependent.

Imputed Income
Other employer-sponsored benefits may be cost-free to the worker but are taxable nonetheless. For example, when an employer pays for certain worker benefits, it goes on the books as "imputed income." In other words, the worker may not have to pay for the benefit, but he does have to report and pay taxes on the cost or value of that benefit.

The following are examples of employer benefits that qualify as imputed income.

Group Term Life Insurance
Workers who receive group term life insurance in excess of $50,000, regardless of whether premiums are paid by the employer or are paid on a pre-tax basis by the worker, must report the cost paid as imputed income. This is because group policies tend to offer lower premiums, so it is considered an employer benefit. Thus the excess amount is taxed to the worker if he's paying the additional cost on a pre-tax basis

However, there are exceptions. The amount in excess of $50,000 is not subject to taxes if:

• If the coverage is provided after a worker becomes disabled
• If the employer is a named beneficiary for all or a portion of the life insurance proceeds
• If a charity is named the sole beneficiary
• A plan that differentiates coverage for key employees must include the full value of the life insurance coverage and that amount is taxed as income for those specific workers

Note that employer-paid premiums for coverage of more than $2,000 for a worker's spouse or dependents may be taxable. Premiums paid for less than $2,000 face amount are excluded.

Long Term Disability (LTD)
Basic LTD premiums are generally paid for by the employer, but workers often are given the choice of how this benefit is taxed. If the employer reports the premium cost on the worker's W-2 as imputed income, the worker will pay taxes on that amount but LTD benefits would be received tax-free. If the employer does not report the premiums as imputed income, the worker will have to pay taxes on any LTD payouts received.

Wellness Benefits
In recent years, employers have upped the ante when it comes to rewarding workers for healthy behaviors and results. However, cash and non-cash incentives, payments and rewards are not necessarily excluded from taxable income simply because they are associated with an employer wellness program. The following two lists details what types of rewards are taxable and what are tax free:

Taxable
• All cash payments, no matter how small
• Health plan premium reduction amounts
• Reimbursements of health insurance premiums

Tax-Free
• Biometric screenings
• Smoking cessation programs
• Health risk assessments
• Low value rewards, such as a tee shirt or water bottle

Athletic Facilities
Workers offered free or low-cost use of an employer-operated gym or other onsite athletic club are not taxed for the value of this benefit. However, if the employer pays for a worker's use of an off-site fitness facility, this cost is reported as imputed income.

Holiday Gifts
A low-value gift from an employer that is not administratively feasible to track, such as a turkey or ham gifted during the holiday season, is considered de minimis fringe and not reported as taxable income. However, any cash amount, gift certificate or large-value item should be reported as imputed income. Taxable gifts include season tickets to sporting or theatrical events, membership at a private country club, or even a tablet or flat screen television won at a company party raffle. While there is no hard-and-fast dollar amount that triggers a taxable gift, Treasury regulation and IRS guidance tend to red flag items valued at more than $100. Any amount of cash or gift certificate is considered taxable.

Educational Assistance
Employers may provide workers up to $5,250 per calendar year for tax-free undergraduate and graduate education expenses. Amounts above that threshold should be reported as imputed income.

Domestic Partner Benefits
When employers pay all or a portion of premiums for health insurance benefits for domestic partners or other beneficiaries who are not legal spouses or qualified dependents, those premiums are reported as imputed income – taxable to the worker.

FICA Taxes
In 2017, the wage base limit for Social Security and Medicare (FICA) taxes will be $127,200, up from $118,500 in 2016. Imputed income is subject to withholding for FICA tax purposes but is not subject to federal income tax withholding rules. Be aware, too, that imputed income also may be used to determine support payments in the event of a divorce.

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