With $352/month inappropriately taken out of the pay for health insurance and no correction made by the employer, the W-2 will show lower amounts in boxes 1, 2, 3 and 5 than would otherwise be the case. Reported this way on the tax return, the lower box 1 amount would result in a lower tax liability, but the difference in tax liability wouldn't come close to making up for the fact that more of the pay went to health insurance than should have. For example, if the marginal tax rate is 22% it would mean recovering only 22% plus 7.65% FICA via the reduction in tax liability. The only proper correction would be for the employer to refund to you the excess amounts paid, withhold from that the additional amounts that should have been withheld for income, Social security and Medicare taxes, and issue a W-2 that reflects the corrections. The employer would have to obtain from the health plan excess amounts they paid to the plan. (Much easier for everyone involved if the employer makes the correction before year-end than to delay the correction until next year.)
