Ask The Taxgirl: Healthcare Benefits & Taxes

Taxpayer asks:

My brother works for a company who pays $12K a year for his health insurance
He is 64, single, no children, no ex-wife
My brother understands starting in 2011 the government will treat the $12K as income and he will be taxed on it
Also because it is over $8,000 a year it is considered a Cadillac plan and he will also have to pay a 40% penalty on the extra $4K
So he estimates he will have to pay an extra $450 a month in extra taxes
Is this fact ?
Will this be worse for married couples with children?

Thanks in advance

Taxgirl says:

*Sigh* This is the problem with the health care bill. It’s so giant that very few people have read it (including many in Congress). It’s no wonder, then, that many taxpayers are confused about what it actually means for them. I think your brother is one of them; it sounds like he’s operating under a couple of misconceptions. Let me see if I can clear it up for him.

For tax years beginning after December 31, 2010 (the fancy way of saying the 2011 tax year), employers will be required to report health care benefits on a form W-2. This is a reporting requirement. It is not a taxing requirement. In other words, your health care benefits won’t be taxed any differently for the 2010 (or 2011) tax year as they were for 2009. In fact, there is not a provision in the new law to tax health care benefits for individual taxpayers. If you receive one of those chain emails stating otherwise, ignore it. It’s a fake. If you want to see for yourself, the reporting requirement is in section 9002 of the new law.

With respect to the Cadillac plans, the excise tax on these plans is not effective until 2018. The amounts have increased so that the threshold amount for singles is $10,200 and the threshold amount for families is $27,500. There are some exceptions to those amounts (they’re higher in some instances) and they are indexed for inflation. More importantly, the tax is on the insurer, not on the insured. (Do I think that those amounts will eventually be passed along to the consumer? Sure I do. But for now, it’s not a direct tax.) This provision is located in section 9001 of the bill and section 1401 of the reconciliation bill.

You can read my original summary of some of the highlights of the law here. And if you want to read the whole kit and caboodle – all 906 pages of it – you can download it as a pdf here. The reconciliation act – just 55 pages – can be downloaded as a pdf here.

I hope that clears up some of the confusion!

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Kelly Phillips Erb

Kelly Phillips Erb is a tax attorney, tax writer, and podcaster.

See Full Bio