8790 / Is the value of employer-provided coverage under accident or health insurance taxable income to an employee if the employee has a choice as to whether to receive coverage or a higher salary?

Outside of the context of cafeteria plans, if an employer offers an employee a choice between a lower salary and employer-paid health insurance or a higher salary and no health insurance, the employee must include the full amount of the higher salary in income regardless of the employee’s choice. If the employee selects the health insurance option, the IRS will deem the employee to have received the higher salary and, in turn, paid a portion of the salary equal to the health insurance premium to the insurance company.¹

However, a federal district court faced with a similar fact situation ruled that for employees who accept employer-paid health insurance coverage, the difference between the higher salary and the lower one is not subject to FICA and FUTA taxes or to income tax withholding.²

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1. Let. Rul. 9406002. See also Let. Rul. 9513027.

2. Express Oil Change, Inc. v. U.S., 25 F. Supp. 2d 1313 (N.D. Ala. 1996), aff’d, 162 F.3d 1290 (11th Cir. 1998).