This page outlines various tax implications of insurance benefits. While references are made to UUA insurance plans, the information applies to insurance offered by other providers, as well.
Health and Dental Plans
Keeping Premiums Pre-Tax
Employers have the ability to set up a Section 125 Plan for the sole purpose of designating health insurance and dental insurance contributions as pre-tax. Many of our congregations do this. There are different types of Section 125 Plans. Simply to make employee health and dental contributions pre-tax, you want a Premium Only Plan (POP).
To stay within IRS rules, the Section 125 Plan has to be established by a Board vote before any contributions can be designated as pre-tax. In addition, employees have to sign a form indicating their acceptance of the Sect 125 Plan.
We recommend using your congregation's tax advisor to help set up the Sect 125 Plan. Often, this can be done for a small charge through a payroll company or a local bank; either of those sources should have up-to-date forms and a well-defined process for plan startup.
Once the initial set-up is complete, the congregation should put the Board-approved plan in safe, permanent storage, keep the employee acceptance forms in the employees' files, and notify their payroll processor of the health and/or dental deductions to be designated as pre-tax.
Tax-Free Reimbursement of Other Insurance
Important Note: The information in this section is based on the understandings of a former Church Staff Finances leader who researched these issues in 2015, in the early days of the Affordable Care Act. We have had trouble verifying what is posted below and are in the process of getting a legal opinion on employer reimbursement for other group and individual insurance, as well as on Medicare reimbursement. Thank you for your understanding.
Are some of your staff covered by group health insurance other than your employer plan? (Most often, this happens when they are covered on a spouse's plan.) If so, you can reimburse the staff member for the differential cost of being on other group insurance – with no tax impact. In other words, your employee can receive from you, tax-free, the additional premium required to be carried on another group plan. Note that it is illegal to reimburse employees for premiums paid for an individual plan, including a plan purchased on a state insurance exchange. Medicare reimbursement rules are different and a bit complicated. Please contact us if you have questions about Medicare reimbursements and we will do our best to assist.
If you choose to reimburse for other insurance, you should make it a policy to do so for all staff who are eligible for our Health Plan (750 hours/year) but covered elsewhere. This is more equitable than making it part of your negotiation with an individual minister or other employee.
Pointers:
- Ask for documentation of the other coverage. Confirm that it's group insurance, not individual insurance.
- Get evidence of 1) the total premium paid by the staff member's household for the other insurance, including your staff member, and 2) what the premium would be without your staff member covered. The difference is what you can reimburse tax-free, i.e., the amount the household is paying to cover your staff member on that other plan. Keep records so that all parties have proof that your reimbursement qualifies as nontaxable income. Ask for updated documentation at least annually.
- Reimburse monthly, up to the amount that it would have cost you to carry the staff member, based on the share of the premium that you would have paid.
- As with other forms of reimbursement (professional expenses, for instance), keep this check separate from your regular payroll. It does not appear anywhere on the employee's W-2.
- If you cover a lower percentage of the health insurance premium for part-time staff than for full-time, it is reasonable but by no means necessary to provide a proportionally lower reimbursement. (Keep in mind that if you cover a lower percentage of the premium for part-timers, their share is larger...and on a smaller salary.)
We strongly discourage congregations from offering a salary boost to staff who don't need health insurance. Situations can change in a heartbeat. If your staff member is on their spouse's insurance, divorce or a job change for the spouse could leave your staff member (and dependents) in need of coverage through your plan. Or an employee with individual coverage might later need family coverage. If you have tied their salary to their health insurance needs (or lack thereof), what happens when their circumstances change? If you have employees who don't need your health insurance, and you save money by reimbursing for other insurance as explained above, we suggest setting up a reserve account that can be used for future employee benefit needs.
Long Term Disability and Life Insurance: Imputed Income
Making LTD Benefit Tax-Free
When Long-Term Disability premiums are paid from pre-tax earnings, any benefit later received will be taxed. Conversely, if paid from after-tax earnings, a benefit received will be exempt from federal income tax.
As part of our UUA Benefit Recommendations, we expect congregations to pay the life insurance premiums for their eligible staff, which means they are pre-tax to the employee. How, then, can the congregation ensure that any benefit later received by the employee is tax-free?
Fortunately, there's a simple workaround – adding the cost of the premium to the employee's paycheck as imputed income. This can be done on each paycheck or once on W-2 at the end of the year. You just want to make sure that the total of all premiums paid throughout the calendar year appears on the employee's W-2 so that it becomes taxable income.
IRS Reporting Requirement for Life Insurance
When employers pay for life insurance coverage for their employees, the IRS requires the amount over $50,000 to be reported as taxable income. The taxable amount can either be added as what's called "imputed income" on each paycheck or added to the employee's W-2 of the year. (Any premium paid by the employee can be subtracted from the taxable amount as long as the premium is deducted from the paycheck on a post-tax basis.)
The amount to be taxed is based on Table 2-2 in IRS Publication 15-B. Note that the amount is determined by the age of the employee and the amount of coverage, not by the cost of the coverage. See the information below Table 2-2 for information about coverage for dependents.
The UUA life insurance benefit is twice annual salary – salary plus housing for ministers, up to a maximum coverage amount of $200,000. No other income (e.g,. in lieu of FICA) is included in the coverage amount for life insurance. Based on the insured amount, anyone with income over $25,000 per year would have reportable imputed income.
See "Important Tax Information" and "How to Report Coverage Over the $50,000 Limit" on our Life Insurance Premiums and Tax Information page.