Sickness and injury benefits include workers’ compensation, disability pay, benefits from certain health and long-term care insurance plans, and other types of payments. Certain benefits are specifically exempt from income tax, and other benefits may be partially or totally taxable.
Whether or not sickness and injury benefits are taxable often depends on who paid for the insurance coverage. Generally, if your employer paid for personal injury and accident insurance for you, any benefits you receive are taxable to you. If both you and your employer pay for the insurance plan, you only have to pay tax on the amounts you receive that are due to your employer’s payments. And if you pay the entire cost of the insurance plan, normally none of the benefits you receive would be taxable. If sickness and injury benefits are taxable, they would normally be reported on the wages, salaries, tips, etc. line of your tax return.
Health Insurance Plans
When an employer pays the costs of a health insurance plan for its employees and their spouses and dependents, the cost of the health insurance premiums is a non-taxable benefit for employees. It is not subject to social security or Medicare, or federal income tax. This also applies to reimbursements you receive from a self-insured medical reimbursement plan that your employer maintains.
Benefits in the form of medical expenses that are paid directly to the health care provider on your behalf or that are reimbursed to you are generally not taxable either. But insurance reimbursements need to be taken into account when calculating your tax deductions, and must be subtracted from your actual medical expenses in determining the amount of medical expense you can claim as an itemized deduction.
If you do not deduct a medical expense because your total medical expenses were less than the 7.5% of adjusted-gross-income limit for deducting medical expenses, or because you do not itemize, you do not have to include the reimbursement up to the amount of the expense in your income. If the reimbursement is more than the expense, you may have to include the excess in your income.
Cafeteria Plans
If you are covered by an accident or health insurance through a cafeteria plan, any benefits you receive would not be taxable if the amount of the premiums was included in your income. In this case you would be considered to have paid for the coverage. But if the premiums are not included in your income, you are not considered to have paid them, and any benefits would be taxable to you.