475 / How did the Affordable Care Act expand the income exclusion for adult children’s coverage?

If an employer’s accident and health plan continues to provide coverage pursuant to a collective bargaining agreement for an employee who is laid off, the value of the coverage is excluded from the gross income of the laid-off employee.² Terminated employees who receive medical coverage under a medical plan that is part of the former employer’s severance plan are considered to be employees for purposes of IRC Sections 105 and 106. Thus, an employer’s contributions toward medical care for employees are excludable from income under IRC Section 106.³ Otherwise, the exclusion is available only to active employees.

Full-time life insurance salespersons are considered employees if they are employees for Social Security purposes.⁴ Coverage for other commission salespersons is taxable income to the salespersons, unless an employer-employee relationship exists.⁵ In the case of shareholder-employees owning more than 2 percent of the stock of an S corporation, see Q 287.

Discrimination generally does not affect exclusion of the value of coverage. Even if a self-insured medical expense reimbursement plan discriminates in favor of highly compensated employees, the value of coverage is not taxable; only reimbursements are affected ( Q ).

Beginning in January 2012, The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan.

The fact that the cost of an employee’s health care benefits is shown on the employee’s Form W-2 does not mean that the benefits are taxable to the employee. 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.