Is value of sick leave used to pay for health ins at retirement taxable?

[rustyofjpa]

Retiring with 2,300 hours sick leave.  Employer converts this into a formula and uses the value of this sick leave to continue my health insurance (COBRA styled).  My bank of time = about 14 months of health insurance.  Is this taxable and if so, all up front or evenly over the coverage period?

[Critter]

This is a question for the payroll department to answer because it depends on how they are handling the payout.

[Carl]

Overall, I would expect the payout to be included on your final W-2 from the employer. But as Critter#2 says, it depends on how payroll is handling the payout. If they pay it to you, then it's taxable income. What you use that taxable income for (if it's paid directly to you) doesn't matter. It's taxable/reportable income.

[Opus 17 · Accepted solution]

Generally speaking I agree with Carl.  The most likely treatment is that the cash value of the sick time will be reported on your W-2 as cash wages.  It will be subject to social security, medicare, and regular income taxes, whether you get the money directly or it is paid to the insurance company.  It will be taxable all at once, since you "constructively received" it all at once (and then directed how it should be spent on your behalf.)

Then, since your COBRA insurance is being paid with after-tax dollars, you can deduct them as medical expenses (subject to the 10% rule and itemized deduction rules).

I can't think of a way that your employer can pay COBRA payments with pre-tax dollars (unlike your regular premium share when you were an employee.)

If you retain the option of canceling the COBRA coverage early and getting the rest back as money in your pocket, then the income might be reported as it is "received" (by the insurance company) or it might still be treated as being received all at once.  It's a trickier question.

However, your employer may know a loophole that I don't and they will have the final word.