My employer was supposed to be withholding my medical insurance pretax. When I got my 2014 W-2, and tried to claim my insurance as a deduction on my taxes, it stated I could not claim pretax insurance as it would not be counted as part of my gross income.

After research, I realized for the last 2.5 years, my insurance has been withheld incorrectly. I never noticed before, because my premium wasn't 10% of my income to be eligible to claim on my taxes.

My employer is now saying, he is not responsible to pay me the difference, since I didn't notice it.

I was always under the understanding, your employer is responsible to make sure your deductions are withheld correctly.

What are my rights in this situation? I can't seem to find the answer anywhere.

  • 3
    Exactly how was it incorrect? Are you saying that your insurance premiums were included in Box 1 of your W-2? – Ben Miller - Reinstate Monica Feb 6 '15 at 20:32
  • You mean you want your medical insurance premiums to be equal to 10% of your AGI and you want your employer to withhold that much as nontaxable income to you? – Dilip Sarwate Feb 6 '15 at 21:53
  • Are you sure that you qualify for the deduction? See my answer below and the article with regard to what does and doesn't constitute an eligible expense. – JAGAnalyst Feb 6 '15 at 23:44
  • Yes, my health insurance has been withheld post tax instead of pretax. I have pulled my previous years taxes and figured my tax rates using the IRS tax tables, using what my reported income should've been, and I have had over $2,500 withheld that shouldn't have been. My employer would be willing to fix it, if he knew it was his responsibility, but his payroll company told him, the employees are responsible to notice it wasn't reported correctly on the W-2's. Since he was told that, he is not willing to do anything. I always thought it was the employers responsibility to make sure they are with – user25403 Feb 9 '15 at 11:27
  • On each pay stub there should be many numbers; but two are of interest: gross pay and federal taxable wages. Are you saying that on each pay stub the delta between those two numbers didn't equal: health insurance+dental+vision+(flex spending or HSA)+ 401K? On my pay stub each of those smaller values has a asterisk next to them noting that they are pre-tax. – mhoran_psprep Feb 9 '15 at 11:42

I think what you are saying is that your employer withheld too much for your taxes because they incorrectly calculated your taxable income, with the result that you paid too much in taxes because your taxable income would have been lower if your employer had correctly deducted the employee-paid portion of your insurance premium from your earned income, and had correctly reported your gross taxable wages.

If that is not correct, please let me know. This answer assumes the above is correct.

For the current year, you need to demonstrate to the IRS that some of your employee-paid premiums were included in Box 1 of your W-2, which under normal circumstances they should not be. In that case, they would be deductible as described by the IRS here. The language you quoted assumes that the premium has already been correctly deducted from your taxable income as reported on your W-2.

Please note that the portion of your premium that was paid by your employer, as well as the portion of your premium that is employee-paid that was correctly deducted from your earned income cannot be deducted on your taxes, as they have already been treated as pre-tax. In order to be able to deduct medical expenses via the 10% rule, you have to have incurred additional expenses beyond what has already been treated as pre-tax. So you would need to have incurred 10% worth of additional expenses in order to claim the deduction, including the amount incorrectly not deducted from your earned income, but excluding the employer and employee-paid portions of the premium that were correctly deducted (these amounts would not count toward the 10% as documented in the linked article). You need to verify that the expenses not already considered pre-tax are over 10% (including any amount correctly deducted), not just that the total employee-paid portion of the premium is over 10%.

However, for the previous tax years where you have possibly already overpaid on your taxes due to the error, you now have a legal issue with your employer.

You will have to decide whether the potential tax savings for this year and the potential restitution for previous years are worth a potential audit for the current tax year (which is its own headache and expense), and/or finding a new job and/or the time and expense of a lawsuit if things go badly with your employer. If you do decide to pursue action on your own, be sure to prepare seriously and consult a lawyer and/or a CPA before making any allegations against your employer. If they broke the law, both the company as well as the individuals involved could be penalized.

Lastly, I'd strongly recommend considering whether you want to continue to work long-term for a boss whose answer wasn't "We'll find out what went wrong, and make it right".

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