Understanding MD Employee Accident and Health Benefits

Posted on February 18, 2015 by Dr. David Edward Marcinko MBA MEd CMP™

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Tax-free benefits provided to employees

[By Perry D’alessio CPA]

perry-dalessio-cpaMore and more physicians are employees; not employers.

So, here are the most common types of tax-free benefits provided to employees.

They include payments for health care insurance, payment to a fund that provides accident and health benefit directly to the employee, company direct reimbursements for employee medical expenses and contributions to an Archer MSA (medical savings account).

The IRS definition of employee, for health care benefit purposes, is very broad

Health benefits are exempt from income, FICA and FUTA (Federal Unemployment Tax).    This saves the employer 7.65% that would otherwise be the “matching” 6.2% Social Security tax and the 1.45% Medicare Tax components due if these were true wages.  The employer also saves the 0.8% FUTA tax, but since FUTA taxes only the first $7,000 of calendar year wages, per employee, this usually doesn’t factor in.

Calculation:

If you pay the full state unemployment tax, then your FUTA tax = Gross Salary * .08% – The maximum amount is $56 per employee:

  • $50,000 Salary = ($7,000)*(.8%) = $56.00
  • $5,000 Salary = ($5,000)*(.8%) = $40.00

The hospital employee saves federal income taxes on health benefits received, at their marginal tax rate, and, their components of FICA taxes. Depending on the coverage provided, these plans, when fully funded by the employer, can save the employee thousands of dollars in taxes each year.

IRS restrictions include:

  • Certain payments to S Corporation employees who are 2% shareholders are subject to FICA taxes.
  • Certain long term care benefits.
  • Certain payments for highly compensated employees.

Example 1: Let’s say the annual cost of providing medical coverage for an employee, age 50, with a spouse and two minor children is $7,500. An employee in the 30% tax bracket who received this amount in cash each year and then paid for his or her own medical coverage would be liable for as much as $2,250 in income taxes. In addition, FICA taxes save another 7.65% or $574, for a total savings to the employee of $2,824. The employer saves $574 in FICA taxes.

Benefits

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