Insurance benefits may include medical, dental, vision, and life insurance. Deductions are usually taken from every paycheck to help defray the cost of the insurance, either in part or in total. A company may contribute to this cost by paying for some portion or all of the insurance itself. Even if employees pay the entire amount of the insurance, it is still usually less expensive than if they had obtained it themselves, since insurance companies generally quote lower prices to businesses employing a number of people. The contribution made by the company to defray the cost of medical insurance is not considered income to employees. Furthermore, if the company has a medical expense reimbursement plan under which employees can be reimbursed for any out-of-pocket medical expenses incurred by them, these additional payments also are not considered income to employees.

Example. In a sudden burst of generosity, the president of the Humble Pie Company announces at the company business party that all co-payments and deductibles on its medical insurance plan for the upcoming year will be paid by the company. These reimbursements are not taxable income to the employees.

The most common ways to provide medical insurance are through the Health Maintenance Organization (HMO), Preferred Provider Organization (PPO), and Point of Service (POS) plan.

• The HMO arrangement requires employees to go to designated doctors who have signed up to participate in the plan.

• The PPO option allows employees to consult with doctors outside of the group of designated doctors, but at a higher cost in terms of co-payments and deductibles.

• The POS plan requires employees to choose a primary care doctor from within the HMO network of doctors, but they can then see doctors outside the HMO's network, as long as the primary care doctor is still the primary point of contact.

Given the high cost of medical insurance provided by third parties, some organizations are turning to self-insurance plans. Under this approach, employee medical claims are submitted directly to the company or a third-party administrator, with the claims in either case being paid by the company. Once total claims reach a certain point, a stop-loss insurance policy takes over and pays all remaining claims. This stop-loss coverage prevents the company from incurring inordinate losses by providing umbrella coverage for major insurance claims. This approach eliminates the profit that would otherwise be charged by a third-party medical provider, while also allowing the company to exert more control over employee claims.

A key drawback to this arrangement is that if the plan's benefits are skewed in favor of highly compensated employees, the excess medical payments made on behalf of this group will be considered income to them for tax reporting purposes. Excess payments are considered to be those paid that exceed the level of payments made to other employees in the plan. In order not to be considered discriminatory, a self-insured plan should include at least 70 percent of all employees.

Example. The management team of the Humble Pie Company is offered free corrective eye surgery; it is not offered to other employees. The Chief Financial Officer (CFO) has this surgery, which costs $2,200. The entire cost of this surgery should be added to the CFO's reportable income, since the benefit was not made available to the rest of the company.