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.
Helping Employees Pay for Other Insurance
Updated September 2024: Reimbursing employees for other health insurance is a complex topic and we've recently come to new understandings about how to do it legally. See our page on Employees with Other Health Insurance for more information.
The UUA does not have a position on whether congregations should help their employees pay for health insurance obtained through other sources. If you choose to do so, we urge the leadership to establish a clear, transparent, and equitable policy.
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.
We've recently learned of some ministers having difficulty with their housing allowance being recognized during the LTD claims process. To avoid this additional challenge, we recommend that congregations report the annual amount of the housing allowance in box 14 of the minister's W2. More detailed instructions are available on our Completing W-2 Forms page.
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.