Which Is Better for Health Insurance: Deducted Pretax or After Tax?

by Sara Mahuron, Demand Media
    Pretax and after-tax payment of insurance premiums each could mean more money in your pocket.

    Pretax and after-tax payment of insurance premiums each could mean more money in your pocket.

    Health insurance doesn't always come easy -- several decisions need to be made. You may have picked the best plan for you and now you will need to decide the best way to pay your portion of the insurance premium. Pretax or post-tax, you might ask. Generally, paying your portion of your health insurance premium pretax is the way to go. But there are exceptions, so weigh your options wisely so you can make an educated decision.

    Cafeteria Plan

    If your employer offers you the option to pay your portion of your health insurance premium before taxes are withheld, it has a cafeteria plan set up with the Internal Revenue Service. This plan meets the requirements of Section 125 of the Internal Revenue Code and may also be known as a Section 125 plan. There is no other way an employer can make your health insurance nontaxable.

    Pay Pretax

    By taking advantage of your employer's cafeteria plan, you can enjoy the benefit of having your portion of your health insurance premiums taken out of your paycheck before taxes. You do not have to file any special tax forms. The amount of your insurance premiums is withheld from your wages. As a result, not only will you save on federal and state taxes, but you will also not pay Medicare tax or Social Security Tax on this amount. This can save you 7.65 percent on these two latter taxes.

    Post-Tax

    Most people benefit the greatest from paying their premiums pretax. However, since it does reduce a person's wages, this does mean it can have an impact on your Social Security. Your wages earned will be reported to Social Security minus the amount of your health insurance. This could your retirement benefit and may be a concern if you are near retirement.

    Flexible Spending Accounts

    Employees can pay for other eligible healthcare expenses using a flexible spending account through their employer. This works similar to having your health insurance premiums deducted pretax, but it can be used to pay your deductible, co-pay, medications and other expenses you incur throughout the year. It cannot be used to pay premiums. If you elect not to have your employer take the premium out pretax, you will not be able to use your flexible spending account in lieu of this benefit.

    About the Author

    Sara Mahuron specializes in adult/higher education, parenting, budget travel and personal finance. She earned an M.S. in adult/organizational learning and leadership, as well as an Ed.S. in educational leadership, both from the University of Idaho. Mahuron also holds a B.S. in psychology and a B.A. in international studies-business and economics.

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