Pretax Health Insurance: Flexible Benefits Program

Purpose

This document provides an overview and example of the Research Foundation (RF) Flexible Benefits Program.

Background

Section 125 of the Federal Tax Code permits employers to treat employee health insurance premiums as an employer-paid benefit not subject to federal and state income taxes and Social Security (FICA) taxes. The Research Foundation (RF) offers a Flexible Benefits Program that allows employees to pay health insurance premiums on a pretax basis, resulting in lower tax withholding and higher take-home pay. Savings under the program will vary depending on the health plan chosen, whether an employee has individual or family coverage, and the number of withholding allowances claimed for tax purposes.

Pretax or After-Tax Biweekly Deductions

After employees have chosen the type of health coverage they desire (the Research Foundation Regular Health Plan or a Health Maintenance Organization [HMO]), they are automatically enrolled in the Flexible Benefits Program unless they decide not to participate and complete a "Participant Waiver Form for Regular Employees."

Who is Eligible

Active employees who enroll in the Research Foundation Regular Health Insurance Plan or a Health Maintenance Organization (HMO) may participate in the Flexible Benefits Program.

Domestic Partner Coverage

Domestic partners are not eligible for pretax deductions, unless the domestic partner is a dependent under Internal Revenue Service rules.

Premiums for coverage that includes a domestic partner who is not a dependent must therefore be paid on an after-tax basis. The portion of the premium for individual coverage can remain on a pretax basis.

Changes in Participation Status

Once an employee is enrolled in the program, he or she may not discontinue or change the pretax health insurance deduction during the calendar year unless the change in coverage is because of a qualifying event. Refer to the document "Qualifying Events Permitting Pretax Deduction Changes."

Although changes in Flexible Benefits participation status cannot be made during the year, in some cases other changes will affect pretax status. For example, if a change is made from "individual" to "individual plus dependents" coverage during the year without a qualifying event, only the individual portion of the deduction will remain pretax, while the dependent portion of the deduction will be after-tax until January 1 of the following calendar year.

Impact on Social Security

Pretax health insurance deductions are not considered part of an employee's salary and are therefore not subject to Social Security (FICA) taxes. As a result of the reduction in FICA taxes, an employee's Social Security benefit amount received at retirement may be slightly reduced. The employer and employee contribution for FICA taxes will be reduced by the amount of pretax biweekly deductions unless an employee is earning a salary greater than the Social Security Wage Base in effect during active employment. FICA taxes are calculated based on the current rate in effect when biweekly deductions are taken.

Impact on Salary-Based Benefits

Pretax health deductions will not affect the level of an employee's RF benefits that are based on compensation. Benefits such as life insurance, disability insurance, and retirement contributions will continue to be based on gross salary before the pretax health insurance deduction.

Example of Savings With Pretax Health Deductions

The following example illustrates take home pay for an employee enrolled in family health insurance coverage:

Deductions

Flexible Benefits

No Flexible Benefits

annual earnings

$30,000

$30,000

Minus: annual health insurance contribution

$2,860

0

taxable earnings

$27,140

$30,000

Minus: federal taxes

$4,071

$4,504

Minus: state taxes

$1,186

$1,357

Minus: FICA (current rate)

$2,076

$2,295

after-tax earnings

$19,807

$21,844

Minus: after-tax health insurance payment

0

$2,860

take-home pay:

$19,807

$18,984

This example results in a 2006 tax savings of $823 for a person enrolled in a family health plan, participating in the Flexible Benefits Program, and married filing jointly. Savings will vary according to actual income and tax status.

Change History

 

 

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