Question

Q:

The employees of the city of Greenville must make mandatory contributions to the city's postretirement health benefit plan. The employees' contributions are placed in a trust and are used exclusively for the employees' benefits. The employees believe that because they are required to make the contributions from their base salaries, the result should be the same as if the employer made the contribution and had reduced their salaries by the amount of the contributions. As a result, the employees believe they should be permitted to exclude the payments from gross income. The employees have asked you to research the issue.

Answer 1

Contributions made towards post retirement health benefit plan by the employee reduces the taxable income. Amount of contributions made towards the long term health benefit plans (in the form of health insurance premium etc.) directly decrease the gross pay of employee (by amount of premium paid) and hence the taxable income. This helps the employee to avail tax benefits while paying taxes like municipality, state and federal taxes etc.

On the other hand if the employer pays the long term health premium on behalf of employees the amount paid is not considered as wages paid to employee and hence not eligible for state, municipality and federal tax withholding. Thus no tax benefits will be passed over to employee.