Retiree Health Insurance Tax Rules

[Jdub1234]

I had a tax question brought up to me at work today and I wasn't aware of the answer, and I'm wondering if you had any insight on this topic.

For retirees at a certain company we work with, they are promised health insurance for life once they are retirees. Their new policy gives them a choice of Health insurance for life or an annual payment of 35% of the value of the health insurance payment for that year.

If they were only offered 1 option (health insurance for life), that would be non-taxable, but now since the policy lets you choose one between the other (health insurance or payments), would both of those options; whichever one you choose, be taxable to the Retiree? And if so, would a 1099 or W-2 be issued to them?

 

[Taxing Matters]

I had a tax question brought up to me at work today and I wasn't aware of the answer, and I'm wondering if you had any insight on this topic.

For retirees at a certain company we work with, they are promised health insurance for life once they are retirees. Their new policy gives them a choice of Health insurance for life or an annual payment of 35% of the value of the health insurance payment for that year.

If they were only offered 1 option (health insurance for life), that would be non-taxable, but now since the policy lets you choose one between the other (health insurance or payments), would both of those options; whichever one you choose, be taxable to the Retiree? And if so, would a 1099 or W-2 be issued to them?

If the employer properly sets it up to qualify as a cafeteria plan under Internal Revenue Code (IRC) § 125 then if the retiree elects the health insurance benefit then the employer's contributions to that health care plan are not taxable income to the retiree. The election to take cash, of course, means the cash received is taxable income to the retiree. The employer ought to consult a tax lawyer or other tax professional familiar with cafeteria plans to get it set up right and to ensure that the proper reporting of any benefits is done.