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Understanding Health Insurance Payroll Deductions

Are health insurance payroll deductions voluntary?

What is the difference between a pre-tax deduction and a post-tax deduction?

A post-tax health insurance payroll deduction is taken out of your employees gross pay after Medicare, state and federal taxes have been calculated. A pre-tax deduction is taken out before, which reduces the employee's tax liability. In order for health insurance payroll deductions to be pre-tax, your plan must meet the requirements of section 125 of the Internal Revenue Code.

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    Are health insurance payroll deductions voluntary?

    There are two kinds of payroll deductions. Statutory deductions are mandatory and include deductions for Medicare and federal and state taxes. The second kind of payroll deduction is a voluntary deduction which employees must agree to pay. Health insurance payroll deductions are offered by you to your employees, and because prospective employees can decide to not accept them, they are voluntary.

    What is the difference between a pre-tax deduction and a post-tax deduction?

    A post-tax health insurance payroll deduction is taken out of your employees gross pay after Medicare, state and federal taxes have been calculated. A pre-tax deduction is taken out before, which reduces the employee's tax liability. In order for health insurance payroll deductions to be pre-tax, your plan must meet the requirements of section 125 of the Internal Revenue Code.

    What is mandated by section 125 of the Internal Revenue Code?

    A health insurance plan that meets the requirements of section 125 is often referred to as a cafeteria plan. Your cafeteria plan for your employees must allow them to choose at least one taxable benefit and one qualified benefit. Qualified benefits include accident and health benefits, assistance with adoption and dependent care assistance.

    Who is covered under a cafeteria plan?

    Cafeteria plans are desired by employees because it lowers their taxable income, something that helps attract employees to your business. Better yet, cafeteria plans extend coverage beyond just your employees. Cafeteria plans cover your employees, their spouses and their dependents.

    The kind of payroll deduction your health insurance plan entails depends on the health insurance plan you offer. Health insurance laws are extensive so be sure to investigate them thoroughly before offering any form of insurance.

    The PEO’s bargaining power gives smaller companies the advantage of “larger company” benefits. These plans are normally only available to larger corporations.

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