Colorado Life Producer License Practice Test

Are premiums tax deductible to the employee as a business expense for group coverage?

1. Yes

2. No

3. Only partially

4. Depends on the insurer

The correct answer is: Yes

In the context of group health insurance coverage, premiums that an employer pays on behalf of their employees can indeed be tax deductible as a business expense. This is a significant benefit for companies as it reduces their taxable income. When an employer provides group health insurance, the IRS allows the premiums paid for employee coverage to be deducted as a necessary expense for the operation of the business. For employees, the situation can be a bit different. Generally, employees cannot deduct the premiums they pay toward their group insurance when premiums are paid with pre-tax dollars via a Section 125 Cafeteria Plan, since these payments have already reduced their taxable income. However, if employees pay premiums with after-tax dollars, they may be eligible for tax deductions, although specific tax rules and individual circumstances can affect this. Overall, the understanding that premiums are tax deductible as a business expense for group coverage helps clarify the benefits of providing such insurance for both employers and employees. It supports the structure and functioning of employment-based insurance systems, encouraging businesses to offer health coverage.