A Tax on Health Benefits

The value of employee health benefits will be placed on Form W-2 starting with the 2011 one. Does that mean health benefits will be considered taxable income? And could you please explain the 40% tax on “Cadillac” plans?

The figure that will appear on the 2011 Form W-2, which you’ll receive in 2012, is only for informational purposes; it does not mean that the benefits will be taxable.

The tax on benefits doesn’t arrive until 2018, when insurers must pay a 40% tax on the portion of employer-sponsored “Cadillac” health-plan benefits that exceeds $10,200 for individuals or $27,500 for families (not including stand-alone vision or dental benefits). That limit includes the employer and employee portions of the premiums, plus any employee contributions to tax-favored health savings accounts and flexible spending accounts. This tax will be levied on insurers, not individuals. But insurers are expected to pass the higher costs on to employers, which are likely to pass them to employees or to trim coverage -- such as by increasing deductibles -- so the premiums will fall below the tax threshold.

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The 40% excise tax will be triggered at a higher level for some groups, including firefighters and others in high-risk professions and retirees 55 and older. For them, the tax will apply to the value of benefits above $11,850 for individual coverage or $30,950 for a family plan.

The average policy currently falls far below those cutoffs. In 2009, employer-provided health insurance cost an average of $4,824 for single coverage and $13,375 for family coverage, according to the Kaiser Family Foundation. But that provides little solace: The trigger points for the tax assume a 55% increase in health-care premiums between now and when the tax goes into effect. If the average cost of family coverage jumps by 55% over that period, it will total approximately $20,750. Add a $2,500 contribution to a medical flex plan to the value of employer-provided health benefits and you’ll be close to the $27,500 limit.

For more information about how the new health-care reform law may affect you, see our Health-Care Reform special report.

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