Aflac payment

[MANDAN]

A client has cancer. He has cancer insurance through Aflac, it's deducted from his pay check, pre tax. He just received $21000 from Aflac. Is it taxable? would he receive any 1099 from Aflac for this payment?

[DaveO]

I believe this works like a private disability policy. If paid with pretax dollars or by the employer it is taxable when a benefit is received.

[taxea]

The only income not taxable would be medical reimbursement. This is income is not for medical purposes, it is employment reimbusement and taxable.

[liberty]

Aflac payment

Why is it employment reimbursement? He had cancer, Alfac payment detailed, First Occur prognosis:9030; anesthesia:70; outpatient surgery: 300; surgery: 1500; hospital benefits:5100; surgery: 1500.........
Premium was paid through pre-tax Cafeteria plan. So the whole payment is taxable, right?

[Burke]

No, not unless this is a disability policy which replaces lost income. I.E, it pays a flat amount. IF it is a medical benefit policy which pays benefits for otherwise deductible medical expenses which could be taken on Sche A, nothing is taxable. Pre-tax premiums are not a factor, except that they cannot be deducted on Sche A. Neither can reimbursed medical expenses.

[liberty]

Burk: Thank you for your reply.
I called IRS, this is what they told me:
If it was pre-tax money, that is at work a cafeteria plan with money taken out of your check before taxes were paid, then it all would be taxable. However, if you paid for the policy from your after tax money then the money paid to you is not taxable or reportable. My client paid premium from pre tax money.
AFLAC told my client they won't be issuing any 1099. In 2016 Aflac had paid him 4 separate payment totaled more than 25000. According to my client, his out of pocket medical exp was no more than 2000. His regular health ins paid majority of medical bill. Except traveling expenses.
My client would like me to tell them the payment is tax free. I am still not sure which is the correct answer.

[kathyc2]

My client would like me to tell them the payment is tax free. I am still not sure which is the correct answer.

Of course they would like you to tell them it's tax free, but from what you have posted, it is not. Following is from Pub 525:



Sickness and Injury Benefits


In most cases, you must report as income any amount you receive for personal injury or sickness through an accident or health plan that is paid for by your employer. If both you and your employer pay for the plan, only the amount you receive that is due to your employer's payments is reported as income. However, certain payments may not be taxable to you. For information on nontaxable payments, see Military and Government Disability Pensions and Other Sickness and Injury Benefits , later in this discussion.




Do not report as income any amounts paid to reimburse you for medical expenses you incurred after the plan was established.

Cost paid by you. If you pay the entire cost of an accident or health plan, don't include any amounts you receive from the plan for personal injury or sickness as income on your tax return. If your plan reimbursed you for medical expenses you deducted in an earlier year, you may have to include some, or all, of the reimbursement in your income. See Recoveries under Miscellaneous Income, later.

Cafeteria plans. In most cases, if you are covered by an accident or health insurance plan through a cafeteria plan, and the amount of the insurance premiums wasn't included in your income, you aren't considered to have paid the premiums and you must include any benefits you receive in your income. If the amount of the premiums was included in your income, you are considered to have paid the premiums and any benefits you receive aren't taxable.

[Burke]

In 2016 Aflac had paid him 4 separate payment totaled more than 25000. According to my client, his out of pocket medical exp was no more than 2000. His regular health ins paid majority of medical bill. Except traveling expenses. My client would like me to tell them the payment is tax free. I am still not sure which is the correct answer.

Then based on this, this IS a disability (income replacement) policy. It does not pay the hospital, doctor, pharmacy, etc directly for the exact expense incurred. And what the IRS told you is correct -- it IS taxable since premiums were paid through your employer on a pre-tax basis for this type of contract.

[liberty]

Thank you Kathy and Burke. Now I am confident to explain to clients why it is taxable.

[taxea]

Simply put Alflac is an income insurance policy that pays for loss wages to to whatever. It is income, it is taxable.

[liberty]

The payment he received in 2016 I reported on line 21,1040. However client told me last year when I told him it's taxable, because it was paid with pre-tax money, the payment would be taxable. So he went in HR asked them he wanted to pay Aflac with after tax money in 2017. This won't change anything for 2016 tax return. However next year when he comes in to file 2017 tax return, how do I calculate the payment he is going to receive in 2017? what % would be taxable?