Federal Tax Considerations for Health Insurance

Adjusted gross income

gross income (all income from whatever sources) minus adjustments to income

Defined-benefit plans

the employer specifies an amount of benefits promised to the employee

Defined-contribution plans

focus on contributions rather than on the benefits they will pay out

IRS

Internal Revenue Service: a U.S. Government agency responsible for collecting of taxes, and enforcement of the Internal Revenue Code

Tax deductible

a qualified expense that may reduce the amount of income subject to taxation

Tax exempt

not subject to taxation

Taxable

subject to taxation

Noncontributory

employer pays entire cost; benefits part of employee's gross income and taxed income

Fully contributory

employee pays entire cost; benefits received tax free by employee

Partially contributory

cost shared by employer and employee; portion paid by employee is received tax free and portion paid by employer is part of employee's gross income and taxed as ordinary income

Long-term care

premiums are deductible; daily benefits that do not exceed costs are tax free; excess costs are taxed

Accidental death and dismemberment

policies are deductible to employer; benefits are tax free

Medical and dental expense

employer premiums are deductible; premium by the employee is not deductible

Key Person

Premium not tax deductible to business
Benefits tax free by business

Buy-sell agreement

Premiums not deductible to business
Benefits tax free by business

How are benefits received by the business from a key person disability insurance?

Income tax free

How are the benefits of group accidental death and dismemberment policy received?

Income tax free

Under a fully contributory health plan, how are benefits received by the employee?

Income tax free

Under what employer-provided plan are the benefits taxable to an employee in proportion to the amount of premium paid by the employer?

Disability income

What is the tax advantage of the employer paying premiums for its employees for disability income insurance?

Premiums are deductible as a business expense

How are individually-owned disability income benefits taxed once received by the insured?

Disability benefits are not taxed; they are received income tax free

In order to be eligible for coverage by an HSA, an individual must also be covered by what type of health plan?

High Deductible Health Plan (HDHP)

How long do short-term disability group plans pay benefits?

For a period of less than 2 years

How are excess funds in an employee's health savings account (HSA) handled?

The funds can be carried forward to the next year

What are the tax implications for employer contributions to Health Reimbursement Accounts?

Employer contributions are tax deductible as business expenses

In group medical and dental expense insurance, what percentage of premium paid by the employer is deductible as a business expense?

100%

To be eligible for a Health Savings Account, an individual must be covered by a

High-deductible health plan

Which of the following statements about HRAs is TRUE?

The account allows roll-over of unused balances at the end of the year at the employer’s discretion

Employers can reduce health plan costs by coupling a Health Reimbursement Account (HRA) with

A high deductible health plan

Assuming that all of the following people are covered by a High Deductible Health Plan and are not claimed as dependents on anyone’s tax returns, which would NOT be eligible for a Health Savings Account?

Amanda is 67 and is covered by a basic medical expense policy

The limits of a health reimbursement account are set by

The employer

Who determines the eligibility and contribution limits in a HRA

The employer determines both

An insured had $500 left in his Health Reimbursement Account when he quit his job. What happens to that money?

The insured can have access to the $500 at his previous employer’s discretion

What is a penalty tax for nonqualified distributions from a health savings account?

20%

An insured is the recipient of an Accidental Death and Dismemberment (AD&D) policy purchased by his employer. The policy pays triple indemnity in case of accidental death. If the insured died as a result of an accident stipulated in the policy, how will the benefits paid be taxed?

Benefits received are considered income tax free

Individuals who itemize deductions can claim deductions for medical expenses not covered by health insurance that exceed what percent of their adjusted gross income?

7.5%

A noncontributory group disability income plan has a 30-day elimination period and offers benefits of $2,000 a month. If an employee is unable to work for 7 months due to a covered disability, the employee will receive

$12,000, all of which is taxable

Group disability income insurance premiums paid by the employer are

Deductible by the employer as an ordinary business expense

The annual contribution limit of a Dependent Care Flexible Spending Account is set by

IRS

What are the 2 types of Flexible Spending Accounts?

Health Care Accounts and Dependent Care Accounts