Group Medical Insurance Taxable Benefit

Tuesday, March 12, 2024 16:23 Posted by Admin

While the salary that you give your employees is important, compensation you provide goes far beyond salary. As an employer, you want to offer an appealing benefits package to your employees as well. Not only does this help attract top talent, it also helps retain them and boost overall morale. These employee benefits that are in addition to their annual salary are called fringe benefits.

So, what exactly are fringe benefits? Are they taxable? And, is group medical insurance considered a taxable fringe benefit? Let’s take a look.

What are Fringe Benefits?

Fringe benefits is a form of compensation that is in addition to an employee’s salary. For instance, an employer is giving their employee a fringe benefit when they let them use a company car for commuting back and forth from work. In other words, fringe benefits are extra little perks that they receive alongside their usual pay.

Any sort of benefit that is offered to employees by the employer in exchange for their services (excluding salary) is considered a fringe benefit. Some types of fringe benefits include life insurance coverage, wellness perks, education stipends, commuter compensation programs, and even group medical insurance. Some businesses like to get really creative and offer benefits that include cocktail Fridays, employer-sponsored dinners, pet care, free haircuts, and more.

Companies of all sizes and in all industries are finding ways to make a significant impact in their employees’ lives through fringe benefits. Many are now providing family care and support stipends, which are meant to support more than just the employee. Stipends may be used for a variety of family-related expenses, such as daycare services, care for elderly parents, and classes for birthing prep.

As an employer, taking this strong family-oriented approach to employee benefits can really make your business stand out amongst the competition and attract quality team members. In fact, studies have shown that employee benefits are important in some way to nearly 75% of job hunters.

Are Fringe Benefits Taxable?

There are a number of different types of fringe benefits that employers can offer their employees. In most cases, fringe benefits are taxable, but there are some exceptions. Like wages, most fringe benefits are subject to federal income taxes: FICA (Social Security and Medicare) and FUTA taxes. Unless the Internal Revenue Service (IRS) openly states that a fringe benefit is nontaxable, you, as the employer, must withhold taxes from fringe benefits to deposit and report your taxes properly.

Some examples of fringe benefits that are considered taxable include paid personal time off, bonus pay, and opeartion of business vehicles outside of the business. Even if you give your employee a gift card, it must be factored in as taxable income on their W-2. You are required to calculate the value of employee fringe benefits by January 31st, the year following the one that you issue them to your workers.

When it comes to federal income tax withholding, you have two options. You can choose to add the determined value of the fringe benefits to the employee’s standard wages, or you can opt to withhold at a rate of 22%. This is the fringe benefit tax rate, and also happens to be the same for supplemental pay.

Which Fringe Benefits are “Tax-Free?”

Put simply, any benefit that an employer provides can be deemed taxable unless the law specifically states that it is not. While there are distinct eligibility rules, the IRS outlines the following benefits as nontaxable, or “tax-free.” These exclusion rules apply to all or part of the value of the benefit.

  • Accident and health benefits (including group health insurance)
  • Achievement awards
  • Adoption assistance
  • Athletic facilities
  • De minimis (minimal) benefits
  • Dependent care assistance
  • Educational assistance
  • Employee discounts
  • Employee stock options
  • Employer-provided cell phones
  • Group-term life insurance coverage
  • HSAs
  • Lodging on your business premises
  • Meals
  • No-additional-cost services
  • Retirement planning services
  • Transportation (commuting) benefits
  • Tuition reduction
  • Working condition benefits

This information, as well as more details about fringe benefit exclusion rules, can be found in IRS 2021 Publication 15-B.

Non-Employee Fringe Benefits

Fringe benefits, whether they’re taxable or not, are not exclusively for your employees. You also have the option to offer these benefits to independent contractors. An independent contractor refers to a worker that is hired to do only a specific job and doesn’t work directly under you.

Unlike your employees, independent contractors are not included on your payroll and you do not take out taxes for them. Though, you still pay them for their services in the form of regular compensation and also fringe benefits. Fringe benefits can also be given to business partners. In either case, these fringe benefits are not taxed. Though, you must report the benefits on your taxes using the following forms:

  • Business Partner: Schedule K-1 (Form 1065), Credits, Deductions, Partner’s Share of Income, etc.
  • Independent Contractor: Form-NEC, for nonemployee compensation.

What is a Cafeteria Plan?

A cafeteria plan, also referred to as a section 125 plan, allows employees to choose the fringe benefits that they want. These benefits are issues as pre-tax deductions, which means that they help decrease the employee’s taxable income, thus, reducing tax liability overall. The selections available to employees include insurance options like group medical insurance, disability insurance, group term life insurance, flexible spending accounts, and HSAs. Additional common selections include adoption assistance and dependent care assistance.

Though, there are some benefits that cannot be included in a section 125 cafeteria plan, such as employee discounts, meals, employer-provided cell phones, educational assistance, tuition reduction, and more. For more information regarding cafeteria plans, you can contact the IRS or reach out to one of the professional insurance brokers at Taylor Benefits Insurance Agency.

Is Group Medical Insurance a Taxable Fringe Benefit?

The majority of employers offer some form of medical insurance coverage to their employees. While some of them pay a percentage of monthly premiums, others issue full coverage and make health insurance free for their workers. While enrollment is always optional, it is one of the most common and best ways for people to get coverage for health-related expenses.

By definition, group medical insurance is considered a fringe benefit as it is seen as an additional perk given to employees that goes beyond financial compensation. Though, the question becomes: Is group medical insurance a taxable fringe benefit? According to the IRS, there is a lengthy list of fringe benefits (outlined above) that are nontaxable and do not need to be included in the employer’s compensation.

Group medical insurance is included on this list of tax-free employee fringe benefits – but up to certain dollar amounts. Premiums that are paid by the employer to provide group health insurance are excused from both federal income and payroll taxes. The percentage of premiums that employees are responsible for are also generally omitted from taxable income. This exclusion of premiums helps to decrease tax bills for most workers in the U.S., resulting in lower after-tax coverage costs overall.

Final Thoughts

While fringe benefits may sound like a complicated concept, it’s just a fancy term that means ‘employee perk.’ They serve as an excellent way to support your employees, increase job satisfaction, and make a meaningful impact in your workers’ everyday lives. Understanding and offering fringe benefits to your employees shouldn’t be a challenge.

Though, at Taylor Benefits Insurance Agency, it is our mission to help you issue and manage taxable and nontaxable fringe benefits that your employees appreciate. Contact us today to learn how we can help!

Written by Todd Taylor

Todd Taylor

Todd Taylor oversees most of the marketing and client administration for the agency with help of an incredible team. Todd is a seasoned benefits insurance broker with over 35 years of industry experience. As the Founder and CEO of Taylor Benefits Insurance Agency, Inc., he provides strategic consultations and high-quality support to ensure his clients’ competitive position in the market.

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