Supplemental health plans and taxability

[Guest aearle]

Are health benefits ever taxable? Especially supplemental plans that pay cash directly to the individual based on an indemnity benefit without coordination of benefits -- thereby leaving a possibility of someone receiving more than they paid toward the medical services. Thanks!

[GBurns]

You might want to ask the supplement provider for some legal documentation on the subject.

Benefits from most supplemental plans are not coordinated with anything and many pay benefits that are not related to or derived from medical expenses. They pay their benefits on account of a personal physical injury or illness. This is no different from the payment under a personal injury case or a disability claim. It has nothing to do with medical expenses.

The benefits are tax free only if the employee paid the premium. If the premium was paid through a Cafeteria Plan (on a tax free basis) that is treated under the tax code as being employer paid NOT employee paid.

If the premiums were pre-taxed, the benefits are taxable income. If the premiums are paid with after tax dollars the benefits are tax free.

You might want to read IRS Technical Advice Memorandum 199936046 which explains the tax free nature of benefits from a supplemental cancer plan.