How can I pay my healthcare premiums and out of pocket expenses pre-tax?

This is a question that we often receive from both employees and employers - everyone is trying to save on taxes.  There are several options available to employers and employees to save on taxes for healthcare expenses and premiums.  The options available to you specifically will depend on your specific situation.  Feel free to call or email us to discuss which options may be best for you.

Section 125 or POP:  An Employer will need to offer a Section 125 Plan that will allow employees to have their premium costs deducted from paychecks on a pre-tax basis.  This plan will run about $100 to $125 per year and will lower the employees’ tax base and in turn the employer’s FICA tax base - a win-win.

A Section 105 plan is essentially a Health Reimbursement Account (HRA) that is typically self-funded by the employer.  The employer pays into the fund and the employees can use the funds for qualified health expenses.  The plan is defined by the employer and can cover any combination of health expenses that are approved as a tax qualified expense.  In this plan, the tax write-off goes to the employer, not the employee and unused funds belong to the employer.  This type of plan will generally cost $300 as a one-time implementation fee and then a $5 per employee per month charge for administration.  Employees submit their claims for unreimbursed health expenses to the administrator who pays the claims to the employee.

If you as the employee are looking to pay qualified health expenses on a pre-tax basis, there are two methods.  The first is a Health Savings Account.  In order to open a HSA at any bank, you must first be enrolled on a HSA compatible medical plan.  If you are enrolled on this type of plan, you can open an HSA account at your personal bank and then have your employer deduct money at your direction from your paycheck to deposit in the HSA account.  You just need to check with your employer to confirm their payroll service works with your bank.  

If you are not enrolled on a HSA compatible medical plan, then the employer may set-up a Flexible Spending Account.  You then decide how much to deduct from your paychecks for unreimbursed health expenses and submit claims when the expense is incurred.  Again, your deductions lower your tax base and the employer’s tax base.  However, unused money in this type of plan is forfeited so you have to estimate your health expenses carefully.  A FSA can also include Dependent Care as well where you can have costs for childcare deducted pre-tax and then be reimbursed.

Tags: FSA, HRA, HSA, section 125, tax