Pre-Taxing Payroll Deductions
Advantages of Pre Tax Health Insurance Deductions
There are two primary advantage of pre-taxing health insurance contributions:
Pre tax contributions can help put more money on your pocket, but the option is not available on every premium payment you may make:
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.
Pre Tax Supplemental Insurance Deductions
Pre taxing supplemental insurance deductions makes sense in most instances except three: when claims payments may exceed out of pocket medical expenses, sometimes when insuring income, or when paying for policies making lump sum payments.
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 life insurance deductions do not comply with IRS guidelines. These contracts already have tax favored features. The death benefit is always paid in full to policyholder heirs without any IRS encumbrances. Plus life insurance policies that accumulate cash value grow free of any levies.
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.
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: