To attract and retain talent, there’s an absolute necessity to establish a competitive employee benefits package. These packages are highly dependent upon health insurance, both with payroll deductions and with regard to taxation. One common query is: Are insurance premium taxes pre tax? The type of health insurance and its structure is the determining factor in the response. This guide covers some of key differences between premiums paid before and after tax and what this means for employers and employees.
What Does Pre-Tax Mean?
An amount deducted from an employee’s gross income before taxes have been calculated, to pay for insurance premiums prior to tax withholding. It lowers the employee’s taxable income, and therefore tax liability. But some employer-sponsored health insurance plans, and some other accounts (such as Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs), have pre-tax deductions.
Advantages of Pre-Tax Deductions:
Tax Savings for Employees: FML doesn’t cost your company anything other than reduced federal income tax, Social Security, and Medicare taxes for your employees.
Employer Tax Savings: Such as, employers cut down the payroll taxes that are included under FICA taxes.
Simplified Administration: Most plans are pre-tax plans that exist to streamline payroll.
Common Pre Tax Insurance Plans
Here are the most popular pre-tax options available for employees and employers:
Section 125 Cafeteria Plans
Section 125 plans are an employee’s choice in what they have available, where they are pre-tax options, including health insurance, dependent care assistance, and group term life insurance. Such plans reduce taxable income, providing the two substantial in savings.
Health Savings Accounts (HSAs)
HSA goes with its partner High Deductible Health Plan (HDHP) to give tax free savings on medicals. HSA deposits, qualified withdrawal distributions, and growth in the HSA are all tax free. Hazard Funds are held by employees and remain even if employees leave.
Flexible Spending Accounts
An FSA is an employer owned account that allows employees to set aside pre tax dollars to pay for qualified medical expenses.
But employees must spend the funds in the plan year; there are few rollover options.
Pre Tax Insurance Premium Work
To better understand how pre-tax premiums affect payroll calculations, consider this example:
The employee gets paid $2,000 biweekly. The employer pays 50% ($300) of health insurance premium of $600. It’s pre-tax, so the employee’s share of $300 would be deducted.
Without Pre-Tax Deduction:
Taxable income = $2,000
FICA tax (7.65%) = $153
With Pre-Tax Deduction:
$2,000-$300 = $1,700
FICA tax (7.65%) = $130.05
The pre-tax deduction reduces taxable income and therewith reduces tax liability on both the employee and employer’s end.
Post Tax Premiums and their Role
Some insurance premiums are not pre-tax. The employers then deduct the post tax premiums from the employee’s net income, so taxes are calculated on the full gross pay. These typically apply to:
Employees buy them individually.
Supplemental coverage premiums, including those not offered as part of employer sponsored plans.
Post-tax premiums don’t cut taxable income, but they may still be for Health Reimbursement Arrangements (HRAs) for example.
Where do you stand on Health Reimbursement Arrangements (HRAs)?
However, unlike many other plans, HRAs provide a distinct benefit because employers can reimburse employees with non taxable funds for medical expenses, including premiums.
Types of HRAs:
Qualified Small Employer HRA (QSEHRA): This plan reimburses individual premiums (and other qualifying expenses) for businesses with fewer than 50 employees.
Individual Coverage HRA (ICHRA): No contribution limits, available to employers of all sizes. The plan however must be affordable under ACA guidelines because of the employers.
Excepted Benefit HRA (EBHRA): A supplementary way to cover conventional as well as unconventional health insurance benefits like dental, vision and so on.
Pre Tax vs. Post Tax Decision
When deciding between pre-tax and post-tax insurance premiums, consider these factors:
Tax Savings: And pre-tax plans usually have more tax benefits for both the employer and the employee.
Plan Flexibility: Employees have more freedom to pick their course of coverage as post tax options.
Employee Retention: A comprehensive set of pre tax benefits show that an employer cares about its employee’s wellbeing.
Key Takeaways
Tax advantages are a big reason why most employer sponsored health insurance premiums are pre tax.
Additional pre tax savings opportunities come in the form of plans like Section 125, HSAs and FSAs.
HRAs can be used by employers to pay for premiums out of non taxable funds.
Knowing the difference between pre tax and post tax premiums makes for better benefit offerings and payroll control.
Employers can mitigate taxes while enhancing their brand and attracting top talent through the writing of the perfect benefits package.
