Q: Can employees elect to pay their medical premiums on an after-tax basis?
We have always required employees who enroll in health and dental coverages to pay their portion of premiums on a pre-tax basis. Recently, several employees (including some executives) have asked if they can elect to pay their premiums on an after-tax basis. It never crossed my mind that anyone would prefer to pay after taxes and forgo the tax savings they would otherwise get.
What types of issues or concerns should we consider before deciding whether to offer the post-tax option?
A: In general, there are potential benefits to employees of allowing them to choose between pre-tax and post-tax payment of premiums, including:
- Employees who pay premiums on an after-tax basis would be allowed to drop those benefits at any time throughout the plan year. Employees that pay premiums on a pre-tax basis as part of a cafeteria plan are subject to tax rules that allow them to change their benefits elections only when certain events occur (such as marriage, divorce, new dependents, loss of other coverage, etc.).
- Such employees will also have higher taxable income, which can be good or bad depending on how you look at it. While they would likely pay more in income taxes, they could receive higher social security benefits upon retirement (because they are paying more into Social Security based on their higher income).
On the other hand, potential downsides include that it may make the administration of benefits more confusing and/or complicated for employees, your HR and benefits staff, and even your cafeteria plan administrator. Careful implementation and employee education would be key.
I recommend you start by consulting your cafeteria plan document to see what it says about the tax treatment of employee-paid premiums. Such documents can be designed to give employees a choice between paying them pre-tax or post-tax. While uncommon, it’s possible your cafeteria plan document already allows this, even if you haven’t been allowing it in practice. If it doesn’t, then you will need to revise the document to allow post-tax payment of premiums going forward.