Taxation of Group Health Insurance

Why are the premiums that an employer pays for group medical insurance NOT subject to Social Security taxes or Medicare taxes?

• They are employee benefits.

• They are business expenses.

• They are not wages.

• They are qualified medical expenses.

Answer explanation

Premiums that employers pay for group medical insurance are not subject to Social Security (FICA) taxes or Medicare taxes because they are not wages.

Which statement is NOT correct about Section 125 cafeteria plans?

• Qualifying medical expenses are reimbursed with funds from an employee's account.

• Reimbursements for qualifying medical expenses are subject to federal income tax.

• Employees allow the employer to withhold part of their pre-tax salary.

• The amount of pre-tax salary that the employer withholds is contributed to the plan.

Answer explanation

When an expense is incurred for a qualifying benefit, the employee is reimbursed with funds from the employee's account.

Which statement is correct about the tax treatment of group disability income benefits?

• An employee pays income tax on the percentage of benefits equal to the percentage of premium the employer paid.

• An employee pays income tax on the percentage of benefits equal to the percentage of premium the employee paid.

• An employee pays income tax on all benefits.

• An employee does not pay income tax on the benefits while disabled.

Answer explanation

The employee is taxed on a percentage of benefits equal to the percentage of premium the employer pays, and the employee receives a percentage of benefits tax free equal to the percentage of premium the employee pays.

A Section 125 cafeteria plan may cover which of these expenses?

• medical monitoring devices-tax health insurance benefits and unreimbursed health insurance premiums

• child day care

• cosmetic treatment

• health insurance premiums

Answer explanation

A cafeteria plan lets employees pay for qualifying medical expenses, including health insurance premiums, with pre-tax income. Cosmetic treatments, child day care, and medical monitoring devices are not qualified medical expenses.