Are supplemental cancer insurance benefits taxable per the IRS? Are the premiums tax deductible and/or eligible for pre-tax payroll elections?
The decisions you make regarding how to pay for a cancer insurance policy can have a profound impact should you be unfortunate enough to file a claim.
The different features spelled out in your policy have varying benefit tax consequences, depending on the premium payment method you choose.
- How a settlement program can reduce medical bills
- Consequences of lump sum and expense-based benefits
- Pre-taxing premiums versus itemized deductions
Taxation of Supplemental Cancer Insurance Benefits
If you received treatments for a cancerous condition during the previous year, then it is possible that some of your benefit payments are taxable per IRS rules. Of course, this holds true only if you purchased a supplemental cancer insurance policy prior to your diagnosis.
The first step in finding the answer will always be to examine the key features contained in your policy. Two important feature lump sum indemnity payments and expense-incurred coverage determine liability. The IRS treats each category differently.
Lump Sum Benefits
Lump sum indemnity benefit payments made by supplemental cancer insurance plans are sometimes taxable – depending on how you paid the premium (pre-tax yes, post-tax no). A policy makes a lump sum payment without the need for the claimant to incur an expense.
For example, an initial diagnosis benefit pays a specified lump sum of money in a single payment. The carrier pays the predetermined amount after you submit the claims paperwork showing a positive pathological report. You do not have to demonstrate that a doctor or lab charged you for the diagnosis in order to qualify.
The carrier will not withhold any money from your claims check but will send a 1099 statement to the IRS for any lump sum payments exceeding $600.
State-based financial assistance programs could help you offset some of these extra obligations. Every penny counts for patients who cannot work while undergoing radiation, chemotherapy, and other treatments. Lost income and extra medical expenses are difficult to manage – even with the claims checks helping out.
Expense-based benefit payments made by supplemental cancer insurance are sometimes taxable – depending on the amount of the claims check relative to the actual expense. The premium payment method is also a factor. The carrier will sometimes withhold money from your claims check under certain circumstance.
Expense-based benefits require the claimant to incur and document an actual expense. Examples include treatments for radiation, chemotherapy, surgery, travel, lodging, hospitalization, etc.
- Expense-based benefits paid using after-tax premiums are subject to taxation.
- Expense-based benefits paid using pre-tax premiums are subject to taxation for the amount that exceeds the actual costs incurred.
The carrier will not withhold money for any expense-based claims payments, and will not send a 1099 statement to the IRS.
Tax Deductible Supplemental Cancer Insurance Premiums
Supplemental cancer insurance premiums are tax deductible. Reducing the net cost helps makes the policy more affordable, which makes it easier to take the most important step – actually completing an application for coverage.
The method that you utilize to pay for the policy can affect the benefit – if the need arises – which we all hope never happens. When you take advantage of tax savings on the premiums, the claims payment may be taxable as noted above.
One of the primary advantages of purchasing a supplemental cancer insurance plan at work is the ability to make premium payments on a pre-tax basis. This reduces the amount of income reported on form W2, which has many advantages.
Pre-tax payroll elections reduce the amount of federal income, FICA, and state income taxes you may owe, which yields the greatest savings compared to any of the alternatives.
Deductions on Form 1040
If you are paying for your supplemental cancer insurance premiums outside of your employer’s payroll process, the premiums may be tax deductible under very rare circumstances. There are three possibilities: itemized medical, business expenses, and self-employed insurance.
Itemized Medical Deductions
The IRS rules allow taxpayers to deduct qualified medical expenses on Schedule A. Amounts exceeding ten percent of adjusted gross income may result in savings. IRS publication 502 lists the types of health insurance that may not qualify as a tax deduction on Schedule A.
Policies that pay you a guaranteed amount each week for a stated number of weeks if you are hospitalized for a sickness are ineligible.
Many plans make payments of a specified amount, based upon the number of days you are confined to the hospital due to cancer. Both skin and internal cancers are sicknesses. Therefore, these policy types are not deductible on Schedule A.
Business Expense Deductions
IRS Schedule C line 14 allows businesses to deduct the cost of employee benefit programs. Any contributions made by a business towards cancer insurance premiums may be tax-deductible to the employer.
The IRS regulations allow self-employed workers to deduct premiums paid for medical and dental insurance. The list of exclusions includes self-insured reserve funds, loss of earnings, certain life insurance, annuities, and insurance to secure a loan.
Most cancer insurance policies do not fit this description. Therefore, the premiums may be tax deductible for the self-employed.
- Schedule A eligible medical expenses
- Schedule C eligible business expenses
- Self- employed health insurance deductions