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Insurance

Example: Assume you're 54 years old and your employer pays for $100,000 of coverage. You're not taxed on the first $50,000 of coverage; your additional income from the excess coverage for the year is only $138 ($2.76 x 50).

Health and accident insurance

Employer-paid health coverage isn't taxable to you, except to the extent it covers a domestic partner. Reimbursement of medical expenses under a company medical reimbursement plan is tax free as well.

Since health costs have skyrocketed, some employers have cut back or eliminated medical insurance as a benefit. Instead, you may be asked to share the cost or pay it entirely. If the company carries group medical coverage, the cost is lower than you would pay if you bought similar coverage individually.

* Flexible spending arrangements (FSAs). Employers may offer the option of participating in an FSA to cover uninsured medical costs. You agree to contribute a certain amount to the plan on a pretax (salary reduction) basis. You can then submit receipts for noncovered medical costs; for example, eyeglasses, hearing aids and the deductible portion of prescription drugs for reimbursement. At the start of each year, project what you might spend throughout the year and then agree to a salary reduction of that amount as your contribution to the FSA. Caution: FSAs have a use-it-or-lose-it feature. If you don't spend everything you've contributed by the end of the year, you forfeit what remains.

Strategy: Participate in flexible spending arrangements to cover medical insurance if this option is open to you. For example, premium-only FSAs let you pay for coverage at group rates on a pretax basis. You agree to reduce your salary in the amount of the premium.

Annual physicals paid by your employer are also tax free, whether or not they're covered by insurance.

* Health reimbursement arrangements (HRAs). Employers may contribute a set dollar amount, say $3,000, to a special account that you can tap to pay medical costs not covered by insurance. You aren't taxed on the contribution nor when you tap into the account. If you don't use up the money in your account, you can carry it forward to be used in a future year.

* Long-term-care insurance. Increasingly, companies are offering this insurance to cover nursing home costs that aren't covered by Medicare or other health insurance. This insurance is treated as health and accident insurance-tax free to you if paid for by your employer.

Health savings accounts (HSAs)
Companies looking for ways to cut their growing cost of health coverage for employees may buy high-deductible health plans (coverage designed for catastrophic rather than routine medical needs). These plans, first authorized on January 1, 2004, can be supplemented with savings-type accounts called a health savings account and are funded with tax-deductible contributions by employers or employees. The following chart shows the requirements for 2004:

Type of coverage Minimum annual deductible Maximum contribution-
out-of-pocket expense limit lesser of deductible or:
Self-only coverage $1,000/$5,000 $2,600
Family coverage $2,000/$10,000 $5,150


You can tap into the account to cover your uninsured medical costs completely tax free. If you use the money for any other purpose, the distributions are taxable. What's more, if you're under age 65, you'll owe a penalty on the distribution.

Strategy: If your employer does not offer health coverage, you can buy your own high-deductible health plan and set up an HSA. Your deduction for contributions to the HSA can be claimed even if you don't itemize your other deductions. For details on insurers offering this type of coverage and trustees of HSA accounts, go to www.hsainsider.com.