Yes, most regular employee health insurance premiums can be excluded from FICA tax when the plan and payroll setup meet IRS rules.
Payroll taxes touch every paycheck, and health insurance premiums often sit right beside them on a pay stub. The central question is whether those premiums count as wages. When a premium is treated as wages, it falls inside Social Security and Medicare tax. When a premium is treated as an accident and health benefit, it usually sits outside FICA.
Here you will see the main patterns in plain language so employees, payroll staff, and small business owners can line up real payroll situations with the tax rules that apply.
Quick Answer On FICA And Health Insurance Premiums
FICA is the combined Social Security and Medicare payroll tax on wages paid for work. A health insurance premium is subject to FICA only when it counts as wages. When a premium is treated as an accident and health benefit or as a qualified cafeteria plan benefit, it usually stays outside the FICA base.
Here is how common setups usually work:
- Employer-paid group health premiums for employees are usually not wages, so FICA does not apply to that cost for the worker.
- Employee premiums paid through a valid Section 125 cafeteria plan on a pre-tax basis are not subject to FICA.
- Employee premiums taken from after-tax pay stay inside FICA wages, even when the money later goes to an insurer.
- Health premiums for more-than-2% S corporation shareholders can be wages for income tax while still outside Social Security and Medicare wages.
- Cash-like wellness or fixed indemnity benefits often count as taxable wages, so the related amounts fall inside FICA.
What FICA Covers And How It Works
The Federal Insurance Contributions Act creates a payroll tax on wages that funds Social Security and Medicare. The Social Security Administration describes FICA as a tax that employers must withhold from employee earnings, with an equal amount paid by the employer.
On the employee side, FICA has two pieces: Social Security tax on wages up to an annual wage base limit and Medicare tax on all wages, with an extra Medicare surtax once wages pass a set threshold. The Internal Revenue Service sets the rates and wage bases each year and explains in Topic No. 751 and Publication 15 what counts as wages for employment tax. Accident and health benefits fall within an exclusion list in Publication 15-B, which explains how many health insurance premiums can be removed from FICA wages when the plan meets the tax code rules.
When Are Employee Health Insurance Premiums Subject To FICA Tax?
Most workers never see health insurance premiums listed as taxable wages on a Form W-2, yet some premiums do fall inside FICA. That happens when the amount is treated as wages under federal employment tax rules.
Premiums usually sit inside FICA in these situations:
- Premiums are paid by the employee with after-tax dollars, outside a cafeteria plan.
- A salary reduction arrangement fails to meet Section 125 cafeteria plan rules, so premiums cannot be treated as pre-tax.
- The benefit is not true accident and health insurance, such as some fixed indemnity products that pay cash without regard to medical expense.
- Cash wellness incentives or reimbursements exceed actual unreimbursed medical expenses.
Recent IRS commentary on wellness and fixed indemnity arrangements stresses that when benefits operate like cash pay, they are wages subject to payroll taxes, including FICA. The next table pulls these patterns into one view.
When Health Insurance Premiums Are Not Subject To FICA
In many workplaces, the usual pattern is that health insurance premiums sit outside FICA wages. That depends on the tax rules for the plan and on how payroll records the contributions.
Employer-Paid Group Health Coverage
When an employer pays some or all of the cost of a group medical plan, those employer contributions are usually excluded from the employee’s wages. IRS Publication 15-B explains that accident and health benefits can be excluded from wages for income tax, Social Security, and Medicare, so the employer share of group premiums normally does not enter FICA wages.
Pre-Tax Premiums Through A Section 125 Cafeteria Plan
Many employers let workers pay their share of medical, dental, or vision premiums with pre-tax dollars through a Section 125 cafeteria plan. Under IRS cafeteria plan guidance, qualified benefits elected in the plan are not subject to FICA, FUTA, Medicare tax, or income tax withholding when the plan follows Section 125 rules, so the premium amount and the matching employer share sit outside FICA.
COBRA Coverage Paid Or Subsidized By An Employer
When coverage continues under COBRA, accident and health rules still apply. Publication 15-B notes that the exclusion for accident and health benefits covers amounts paid to maintain medical coverage for current or former employees under COBRA, and employer COBRA subsidies often follow the same exclusion as regular employer-paid health coverage.
When Health Insurance Premiums Fall Inside FICA Wages
Coverage can look identical from the outside while the FICA result changes inside payroll. Several patterns pull health insurance costs into the FICA wage base.
After-Tax Employee Payroll Deductions
Some employers withhold health insurance premiums from pay on an after-tax basis. In that design, the full gross pay runs through FICA before the deduction is taken, so the deduction reduces take-home pay, not the wage base used for Social Security and Medicare taxes. This setup appears in groups without a Section 125 cafeteria plan or where certain dependents do not qualify for pre-tax treatment, such as a domestic partner surcharge that stays inside FICA wages.
Nonqualifying Wellness Or Fixed Indemnity Arrangements
Some benefit vendors sell fixed indemnity or wellness products that pay cash amounts when an employee completes activities or spends days in a hospital. Recent tax commentary explains that when these benefits pay cash without tying the payment to actual unreimbursed medical expenses, both the premiums and the benefit payments can be treated as taxable wages and are subject to payroll taxes, including FICA.
More-Than-2% S Corporation Shareholder Health Coverage
Health insurance for more-than-2% S corporation shareholders has its own rules. When the S corporation pays or reimburses premiums for these owners, the cost is often added to Box 1 wages on the Form W-2, but not to Social Security and Medicare wage boxes. Those premiums can be treated as wages for income tax withholding while still sitting outside FICA wages, which helps preserve the owner’s deduction for self-employed health insurance.
Summary Table Of Health Premium Scenarios And FICA
| Coverage Or Premium Scenario | FICA Treatment | Practical Notes |
|---|---|---|
| Employer pays full cost of group medical premiums | Not subject to FICA for the employee | Employer accident and health benefits excluded from wages under IRS rules. |
| Employee pays part of premium through Section 125 pre-tax salary reduction | Not subject to FICA | Qualified cafeteria plan benefits are excluded from FICA and income tax withholding. |
| Employee pays premiums with after-tax payroll deductions | Subject to FICA | Gross pay stays in FICA wages; the deduction comes from take-home pay. |
| Employer pays COBRA premiums for a former employee | Usually not subject to FICA | Employer COBRA subsidies often follow the accident and health exclusion. |
| Fixed indemnity plan that pays cash per day of hospital stay | Often subject to FICA | Many indemnity benefits are treated as taxable wages when they mimic income. |
| Wellness plan that pays cash incentives unrelated to expense | Subject to FICA | Cash rewards above unreimbursed medical expenses are treated as wages. |
| More-than-2% S corporation shareholder health premiums | Income tax wages, but often not in Social Security or Medicare wages | Premiums go in Box 1 on the W-2 and can stay out of Boxes 3 and 5. |
How To Read A Pay Stub For FICA And Health Premiums
A pay stub can show exactly how health insurance premiums and FICA interact. Labels differ by payroll system, but the same steps help.
First, find three items: the line that shows gross wages for the period and for the year to date; the lines that show Social Security and Medicare taxes withheld; and the lines that show medical, dental, vision, or other health deductions.
Next, look for clues about whether those health deductions are pre-tax or after-tax. If a medical deduction appears above the taxable wage line for FICA and income tax, it likely reduces the FICA base. If it appears below, it likely does not. The table below gives a simple checklist that ties those clues to likely FICA treatment.
| Pay Stub Clue | What It Suggests | Next Step |
|---|---|---|
| Medical deduction labeled “pre-tax” or “Section 125” | Premium likely excluded from FICA wages | Confirm that the employer sponsors a valid cafeteria plan. |
| Medical deduction listed under “after-tax” or general deductions | Premium likely included in FICA wages | Expect Social Security and Medicare tax on the full gross pay. |
| Employer-paid health coverage listed only in benefit summary | Employer share likely excluded from FICA wages | Check plan materials to see how the coverage qualifies as accident and health benefits. |
| Special line for health premiums for an S corporation shareholder | Amount can be income tax wages but not FICA wages | Review IRS S corporation guidance or ask a qualified tax adviser. |
| Wellness or cash health incentive payments listed as wages | Payments included in FICA wages | Expect Social Security and Medicare tax withholding on those amounts. |
Practical Steps For Employers
Employers carry the responsibility for setting up payroll and benefit plans in line with IRS guidance, including cafeteria plans, wellness programs, and special cases such as S corporation owners and COBRA subsidies.
- Use current IRS publications and tax topics, such as Publication 15, Publication 15-B, and Topic No. 751, as the baseline for what counts as wages and which benefits are excluded.
- Work with benefits counsel or a tax adviser when setting up or changing cafeteria plans, wellness programs, or fixed indemnity coverage; resources such as the RSM cafeteria plan summary can help frame those discussions.
- Document plan terms in writing, share them with employees, and keep payroll codes consistent with the legal design of the plan.
- Review payroll reports each year to confirm that premium deductions flagged as pre-tax do in fact reduce FICA wages the way the plan design intends.
Practical Steps For Employees
Employees do not control plan design, but they can still check whether health insurance premiums appear to be handled correctly for FICA purposes.
- Ask the human resources or payroll team whether the medical, dental, and vision deductions run through a Section 125 cafeteria plan.
- Compare the gross pay on the pay stub with the Social Security and Medicare wage bases on the Form W-2 at year end to see whether pre-tax deductions reduced those wages.
- Read open enrollment materials so that elections line up with the desired tax treatment, especially when choosing between pre-tax and after-tax premium options.
- Reach out to a qualified tax adviser for personal guidance when questions arise about how health premiums fit into overall tax strategy.
References & Sources
- Internal Revenue Service.“FAQs For Government Entities Regarding Cafeteria Plans.”States that qualified cafeteria plan benefits, including many health premiums, are not subject to FICA, FUTA, Medicare tax, or income tax withholding.
- Internal Revenue Service.“Publication 15-B, Employer’s Tax Guide To Fringe Benefits.”Describes how accident and health benefits, including many employer-provided health insurance premiums, can be excluded from employee wages.
- Social Security Administration.“What Are FICA And SECA Taxes?”Defines FICA as the payroll tax that funds Social Security and Medicare and outlines the employer and employee shares.
- RSM US LLP.“IRS Issues Guidelines Regarding Substantiation Of Expenses For Cafeteria Plans.”Summarizes Section 125 cafeteria plan rules and notes that properly structured salary reduction arrangements for group health premiums can be FICA free.