You can only choose whether to have your health insurance premium deductions made with pre-tax or post-tax money if your company offers a flexible benefits or cafeteria-style benefits program. If you're self-employed or your company doesn't offer such a plan, you have to use after-tax dollars. When you have the option to pay with pre-tax money, you might not be asked if you want to use after-tax dollars, and you'll have to specifically request the change to use after-tax money during your annual enrollment process.
Section 125 Plan
If you work for a company and your health insurance plan qualifies as a Section 125 plan, you have the option to have your health insurance premiums deducted either before or after taxes. If you don't have a Section 125 plan, they must be taken after taxes. Check with your human resources department to find out what kind of plan you have if you're not sure. Some states, such as Massachusetts, require that all companies with more than a minimum number of employees offer a Section 125 health insurance plan to employees.
Advantages of Paying Pre-Tax
If you pay your health insurance premiums with after-tax dollars, you'll pay more in federal, state and Medicare taxes than someone who uses pre-tax dollars. Federal, state and Medicare taxes are each computed based on your gross wages. When you have your health insurance premiums deducted on a pre-tax basis, it reduces your gross wages and therefore lowers the amount of federal, state and Medicare taxes you must pay. However, once you choose the option to pay with pre-tax dollars, you can't change your mind until the next enrollment period.
Social Security Consideration
Your gross wages are also the wages that the government considers when calculating your future Social Security benefit. While you're reducing your taxes by paying your health insurance premiums with pre-tax dollars, you're also reducing the amount of your Social Security base wages. The amount of the reduction should not be significant, but you can contact the Social Security Administration to understand how your benefit is calculated to determine if there is a difference. You can elect to have your premiums paid for with after-tax dollars as long as you make that election when you enroll at the beginning of the year.
Health Savings Account
Your employer might also offer the ability for you to contribute to a health savings account using pre-tax money. You can withdraw from the account during the year to pay for your medical expenses and any interest you earn on the money is tax exempt. In 2013, the maximum contribution an individual can make is $3,250, and a family's maximum contribution is $6,450. If you're age 55 or older, you can contribute an additional $1,000 in pre-tax money to the account. However, if you don't spend the money you contribute by the end of the year on qualified health expenses, you lose the remaining balance.
- Colorado State University: Pre-Tax Vs. Post-Tax Deductions
- HealthConnector: Section 125 Plans -- Rules and Regulations
- Washington University: Medical/Dental Insurance for Faculty, Staff & Librarians - Section 125 Plan
- Internal Revenue Service: Health Flexible Spending Arrangements not Subject to $2,500 Limit on Salary Reduction Contributions for Plan Years Beginning Before 2013 and Comments Requested on Potential Modification of Use-or-Lose Rule
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