Tax Incentives for Group Health, Dental, and Life Insurance

We’re not lawyers or accountants, and we don’t give legal or tax advice. We can, however, quote from IRS and California EDD publications that describe how California health and dental insurance employee benefits are treated for tax purposes. (For an example of the tax impact of an employer paying for health plans see above, The Problem with Paying Health Insurance by a Salary Bonus.)

As you can see below, the tax treatment of these benefits provides a valuable incentive to employers to pay for employee health, dental, and life insurance plans. Tax laws allow you to pay your employees with benefits without you or your employees having to pay taxes on those benefits.

 

Federal Tax Treatment

“California Health Insurance Group Plans: If you pay the cost of an accident or health insurance plan for your employees, which may include an employee’s spouse and dependents, your payments are not wages and are not subject to social security, Medicare, and FUTA taxes, or income tax withholding. Generally, this exclusion applies to qualified long-term care insurance contracts.”

(Source: Dept. of the Treasury, Internal Revenue Service, Publication 15, “Circular E, Employer’s Tax Guide,” revised 1/99, p. 9)

 

California State Tax Treatment

Health Plans: Employer-provided coverage under accident or health plans or medical expense reimbursements:

  • Unemployment Insurance: Exempt
  • Employment Training Tax: Exempt
  • State Disability Insurance: Exempt
  • Personal Income Tax Withholding: Not subject (except 2% shareholder-employees of S corps.)
  • Personal Income Tax Wages: Not subject (except 2% shareholder-employees of S corps.)

Life insurance premiums paid on behalf of employees:

  • Unemployment Insurance: Exempt
  • Employment Training Tax: Exempt
  • State Disability Insurance: Exempt
  • Personal Income Tax Withholding: Not subject if group term life insurance
  • Personal Income Tax Wages: Not subject if group term life insurance

 

Get a California small group health insurance quote.