Keep an eye on your next W-2, the employer contribution toward your health insurance will be on it

Within the next two months employees will be receiving the W-2 for 2012. This year employers are required to report the value of health benefits on the W-2 as prescribed by the Affordable Care Act.

Despite the stated purpose of such reporting (from the IRS):

Q1. Does the cost of an employee’s health care benefits shown on the Form W-2 mean that the benefits are taxable to the employee?

A. No. There is nothing about the reporting requirement that causes or will cause excludable employer-provided health coverage to become taxable. The purpose of the reporting requirement is to provide employees useful and comparable consumer information on the cost of their health care coverage.

The information is neither very useful nor does it provide any comparable consumer information. If anything, it does allow employers to show employees what they spend on health care benefits, but this is something wise employers could and should be doing in any case. Creating more reporting to the IRS serves no additional useful purpose for workers.

On the other hand, the information now on the W-2 does provide valuable information to anyone who needs to calculate potential additional federal revenue, to determine the impact on workers of fully or partially taxing such benefits by income levels and other demographics, to estimate the cost sharing ratios by any number of criteria, to better estimate the impact of the so-called Cadillac plan tax coming in a few years. In other words, this is not for your benefit, but rather for government agencies.

Unlike other revenue losers such as mortgage interest and charitable contributions or even unreimbursed medical expenses which must be deducted on ones tax return, the tax-free status of employer payments for a workers health benefits is pretty much under the radar on an individual basis.

True the value of employer paid health benefits is not currently taxable income and this reporting does not change that, but the lost revenue from this tax provision is very significant and must attract the attention of budget and deficit committees in Congress.

My guess is it won’t be too long before the tax free status of health benefits begins to phase out; perhaps starting by eliminating pre-tax employee contributions (Section 125) followed by a phase in of taxable income from employer contributions no doubt starting with higher income individuals. The value of these benefits may even be taxed for Social Security and Medicare purposes as a start.

If Congress ever decides to pay for all that it promises to Americans, we are in for a wild ride … and a reduction in our spendable income.

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