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Pre-Tax Deductions

What’s The Future of Pre-Tax Health Insurance Deductions?

Every year workers save thousands of dollars by participating in workplace pre-tax employee benefit plans. Most of these workers know they are saving money by participating in these plans because someone told them so. However, many do not know why or how much they are saving. But if these benefits vanished, the effect would be immediate and painful.

If this all sounds confusing, that’s because it is confusing. For decades, workers who participate in employer-sponsored cafeteria plans enjoy tax savings that non-participants do not. But that may be changing. The passage of Obamacare, along with several White House tax-reform proposals, and tax recommendations by politicians and thinkers from all political parties is threatening to change this confusing and unequal system.

Employer-Based Cafeteria Plans

Cafeteria Plans are difficult to explain and even more to understand. They are also known as Section 125 plans because they are part of and subject to provisions of Section 125 of the Internal Revenue Code. As part of the tax code, they have specific features that allow employees who purchase benefits under the plan to reduce their gross income and, therefore, the amount of taxes they pay.

Cafeteria plans may include a suite of underlying employee benefits such as medical, dental, vision and group term life insurance, and flexible spending accounts.

A cafeteria plan arrangement is a complicated way of incenting employers to offer workplace health and welfare benefits and for employees to participate in them. However, now that Americans have different options for purchasing insurance and given the fact that millions do not have access to these workplace-only benefits, proponents of employee benefit tax reform are looking to change the system.

Times Are Changing

Obamacare did not address the unequal tax treatment of health insurance in the workplace versus the individual market, however, several Obamacare “alternatives” drafted by conservatives do.
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