Accident and Critical Illness plans are amongst the most popular employee benefits.
‘Invincible’ 28 year old Jake elected his employer’s $6,000 deductible HSA option to keep his premium as low as possible. Sliding into second base, he ruptured a tendon. Fortunately, he also bought a low cost accident plan that paid out $3,000.
Ellen at age 50 bought a critical illness plan through her employer. Faced with a cancer diagnosis, Ellen received a check for $25,000.
Employers offering voluntary benefits like accident and CI plans are often sold on the idea of reducing payroll taxes by letting employees pay premiums on a pre-tax basis. That advice may not be all that it’s “quacked” up to be.
In a recent memo, IRS explains that payments like those made to Jake and Ellen are taxable, unless their premiums were paid on an after-tax basis. And, those payments may also be subject to payroll taxes.
You can read that memo here.
That being said, we still recommend these kinds of voluntary benefits. We also recommend careful consideration of how the premiums are paid.