 Health-care
help set up incorrectly
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 Dear
Tax Talk,
We have group health insurance available at my work. My employer offers employees full coverage. He pays $304 a month per employee. We can add our family but it was way too much. I opted to stay with my current health care, which I can afford.
In turn my employer agreed to put $152 per pay period on my paycheck
to go toward my own health insurance. By doing this he added it
to my gross income, which means that not only am I being taxed on
this money, it looks like this affects my return. Can I subtract
this money from my adjusted gross income and take it as a credit?
-- Jeff
 Dear
Jeff,
It clearly affects your return as it is additional income included
in your Form W-2. You and your employer are the victims of being
ill-advised. The employer is paying payroll taxes unnecessarily,
and you're paying payroll and income taxes unnecessarily. But this
is happening because you're both going about it all wrong.
An employer can establish a health reimbursement
arrangement that is tax-free to the employee and on which the employer
also avoids payroll taxes. An HRA is like a cafeteria plan, but
less formal. However, there are some important rules that an employer
must follow regarding discrimination in favor of highly compensated
or key employees and qualified reimbursements so that the arrangement
is respected by the Internal Revenue Service. Health savings accounts
and other tax-favored health plans are discussed in Publication
969.
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