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Advantages of Pre Tax Health Insurance Deductions
There are two primary advantage of pre-taxing health insurance contributions:
- Payroll tax savings for your employer
- Lower reportable W2 earnings lowers your tax bill in six ways: Federal, State, FICA, AMT, Child and Education tax credits
Pre tax contributions can help put more money on your pocket, but the option is not available on every premium payment you may make:
- Life Insurance
- Critical Illness
Nor is pre-taxing the right choice to make in every circumstance. Learn about the savings potential alongside the consequence when you utilize the benefts - get payments returned directly to you.
Short Term Disability for Pregnancy Pre tax insurance deductions make great sense for most people. There is one very big exception. Women who plan to use disability insurance during maternity leave will have their claims payment reduced. Since the claims payments are likely to be much higher than the premium cost, the numbers work much better using an after tax deduction. Pay more in levies on the smaller premium.
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Employer Payroll Tax Savings Two parties save money when an employee elects to make a before tax deduction at work. The employee lowers his or her W2 earnings which can lower the amount paid in six different ways, including FICA taxation. The burden of funding FICA falls on both the employee and employer. The employer sees this as a payroll expense, and lower payroll translates into lower payroll assessments.
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Pre Tax Deductions Save Taxes 6 Ways Before tax deductions are a helpful way to cut your bill and put extra money in your pocket rather than the government's. In addition to your health insurance deductions you can make pre tax contributions to a 401K, and a flexible spending account to lower your medical expenses, and for child care. There are six different ways a lower W2 income saves you money.
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Pre Tax Supplemental Insurance Deductions
Supplemental health insurance makes cash payments directly to the insured, rather than directly to hospitals and doctors as do traditional health plans. When pre taxing deductions for supplemental insurance the claims payment becomes taxable; but only in the amount that exceeds your un-reimbursed medical expenses.
Short term disability payments are reduced when the premium is paid pre tax. When purchasing short term disability it is best to pay the premium after tax if you expect to use the contract. This is common for women who are planning a pregnancy. These women are planning to use the policy, and the claims payment may greatly exceed the accumulated premium. It makes sense to pay levies on the smaller income (the premium) than on the larger (the claim amount).
Others who purchase short term disability income protection do so to guard against accidents or illnesses that might disrupt their ability to work. While paying using pretax elections their income is higher, and they may be in a higher bracket. Disability replaces only a portion of income, so while receiving claims payments they may be in a lower bracket. Pre taxing premium may make more sense in these scenarios.
Supplemental insurance policies that make lump sum payments, such as critical illness policies, are not eligible for pre tax elections. Pay for these policies after tax, and enjoy the full claims amount when you need it the most.
Pre Tax Life Insurance
Pre Tax Payroll Deductions - Advantages Vary by Income
Pre tax payroll deductions will generate different savings depending upon employee income. As income rises so does the marginal rate for federal and state income tax purposes - and thus so will the savings for both employees and employers.
But the FICA savings drop once an employee reaches an earning threshold. FICA (7.65%) funds both Social Security (6.2%) and Medicare (1.45%). Employees and employers make the same contribution based upon gross income.
Beginning in 2013 these rates are much higher. The FICA tax holiday ended beginning January 1 and employee contributions returned to historic levels. The Social Security component phases out at income above $113,700. There is no income limit on the Medicare contribution, but the rate jumps by .09% for individual gross income above $200,000. This incremental amount is paid by employees, and does not have to be matched by employers.
Pre Tax Health Insurance Deductions Savings Example
Pre tax health insurance deductions save money. Since claims on major medical plans are paid directly to hospitals, doctors and other health care providers there is no consequence when you use the policy. Pre tax deductions are one of several ways to lower group health insurance rates. Let's look at a simple example:
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Pay Premium After-Tax |
Pay Premium Pre-Tax |
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| Gross Pay | $1,000.00 | $1,000.00 |
| Pre-Tax Deduction | $0.00 | $100.00 |
| Gross Income | $1,000.00 | $900.00 |
| Federal Levy - 25% | $250.00 | $225.00 |
| State Levy - 5% | $50.00 | $45.00 |
| FICA Levy - 7.65% | $76.50 | $68.85 |
| Net Income | $623.50 | $661.15 |
