Tax Implications of Employer-Provided Identity Protection Services

January 19, 2016

In August 2015, the IRS released Announcement 2015-22 providing that in specific circumstances the IRS would not require that the value of identity protection services be reported as taxable income. Identity protection services includes credit reporting and monitoring services, identity theft insurance policies, identity restoration services, or other similar services that are provided to individuals who have provided their personal financial data to an organization. Personal financial data includes, but is not limited to, social security numbers and banking or credit account numbers. In Announcement 2015-22, the favorable tax treatment of identity protection services was limited to services provided at no cost by an organization who experienced a data breach to an individual whose personal information may have been compromised by the breach. For example, Anthem made such services available to its members due to a cyber security breach last year.

As a result of comments the IRS received in response to Announcement 2015-22, the IRS released Announcement 2016-02 on December 30, 2015. Announcement 2016-02 allows for the favorable tax treatment of identity protection services provided by an organization or employer, regardless of whether or not a data breach has occurred. This includes when an employer provides identity protection services to its employees at no cost as part of a benefits program.

The Announcements do not allow employees to purchase coverage with pre-tax deductions. Any employee contributions for participation in an employer-sponsored identity protection services plan must be deducted on an after-tax basis.

If you have any questions, please contact your Keller account team.