Many farmers provide health insurance for their employees. In years past; whether the employer offered a qualified group plan or simply paid for the employee's health insurance, the payment of the premium was deductible by the farmer and non-taxable to the employee. However, beginning January 1, 2014, an employee is only non-taxable on health insurance benefits if they received it as part of a qualified group plan. Simply paying for health insurance for the employee no longer works to keep the benefit tax-free.
This means for many of our farmers they will need to include these health insurance premiums as part of wages for the employee when issuing the W-2 at year-end. These premiums will then be subject to FICA and Medicare tax for both the employee and employer. This will result in additional payroll costs to the employer and payroll and income tax costs to the employee.
For example, assume a farmer pays $10,000 for his employee's health insurance. For 2013, the farmer could deduct these premiums and the employee paid no tax on the benefit. Beginning this year (assuming it is not a qualified group plan), the employer and employee will each incur $765 of payroll taxes and the employee will owe $1,500 or more of income tax.
The penalty for not following these rules can be extremely harsh. It is $100 per day per employee that is covered by a non-qualified plan. Therefore, if this applies to you, make sure to review this with your tax advisor to make sure you report these premiums correctly at year-end.