The Pretax Health Insurance Deduction for Employees
A pretax health insurance plan allows you to pay your premiums with before-tax money; your contributions are taken out of your paychecks before taxes are calculated. This results in a reduction of your taxable wages. A pretax health insurance plan must meet some legal criteria to qualify as such.
Your employer can offer you pretax health premiums as long as the plan meets Section 125 of the Internal Revenue Code.
Health Insurance Taxable Benefit
To offer you pretax health insurance, your employer must establish a plan that meets Section 125 of the Internal Revenue Code; this type of plan is also called a cafeteria plan. Your employer must develop a written plan document that describes the benefits offered under the plan. It must also distribute a copy of the plan document to all participants and maintain and update the plan according to changing regulations.
A pretax health insurance plan generally includes medical, dental and vision coverage for you, your spouse and your dependents. Your employer may cover some of the cost. For example, it may cover 70 percent while you pay 30 percent. Your employer may also offer pretax health care reimbursement accounts, which enables you to pay for medical expenses that are not covered by your insurance, such as chiropractic, psychiatric and orthodontic care.
Premiums paid toward a Section 125 health plan are excluded from federal income tax, Social Security tax and Medicare tax. For example, you earn $1,300 biweekly and pay $100 total toward your pretax family health plan. You would subtract $100 from $1,300 to get $1,200, which would be subject to taxation.
State and Local Exceptions
Some states set laws for employers that offer health insurance as employee benefits. For example, in Connecticut, an employer that offers health insurance to be paid partially via payroll deduction must do so under a cafeteria plan.
If you are subjected to state and local income tax withholding, whether pretax contributions are excluded from those taxes depends on your state and local governments. Consult your state revenue agency for its guidelines tax withholding for Section 125 health insurance deductions.
Changes for Filing 2018 Taxes
The only change in this area under the Tax Cuts and Jobs Act applies to employers. Employers who reimburse employees for commuting costs will no longer be able to deduct those costs. Still, health insurance premium paid by employer aren't taxable as long as they qualify.
Filing 2017 Taxes
For those still filing 2017 taxes, you'll notice the gross wages on your yearly W-2 form do not include pretax deductions such as Section 125 health care premiums. To arrive at your true annual wages, add your pretax health insurance deductions to your W-2 taxable wages. On your W-2, this applies to Box 1, which shows your federal wages; Box 3, which shows your Social Security wages; Box 5, which reflects your Medicare wages; if applicable, boxes 16 and 18, which reflect your state and local wages. Your last paycheck stub for the year should show your entire gross wages for the year, which includes pretax deductions. When you make the necessary additions to your W-2 wages, the result should balance with your last paycheck stub for the year.
- Core Documents: Section 125 Employer Guide
- National Conference of State Legislature: States' Use of "Cafeteria Plans" to Provide Health Insurance
- Patriot Software: 4 Things You Need to Know About Taxable Wages
- The Motley Fool: Your Complete Guide to the 2018 Tax Changes
- CNBC: New Tax Law is a Mixed Bag for Your Company Benefits
Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.