Pre-tax premiums choice

[Guest swwnyc]

Can an employer force an employee to pay for premiums on a pre-tax basis? For example, an employee may want to pay for all premiums on an after-tax basis so that his Social Security benefits are not reduced. Another example, an employee may want to pay for disability premiums on an after-tax basis so that the benefits received would not be subject to tax.

I've got an outsourcer saying that all benefits must be paid on a pre-tax basis.

The statute under §125 is pretty sparse, and the proposed regulations Q&A-6 isn't really clear.

Any thoughts?

[QDROphile]

The employer may make benefits available by requiring that the employee choose either cash compensation or benefits (what is known as "pre-tax').

Nothing requires an employer to make benefits available for purchase (what is known as "after-tax").

[jmor99]

An employer can write their plan to state that premiums will be pre-taxed if the employee elects the benefit.

In other words, you want health insurance, you pay your part with pre-tax dollars, no other choice. Under a plan like that, the only way to avoid paying with pre-tax dollars is to not take the benefit.

[GBurns]

swwwnyc,

Have the employee do the actual calculation of the reduction in potential SS benefits. Then have them calculate the tax benefit of nat pre taxing the premium.

If they do so and compare the scenarios, they should see that there most likley is no benefit to not pre-taxing the premium.

As pointed out by jmor99, the plan could actually require that all premiums must be pre-taxed in order to get any health benefits coverage.

[jpod]

The social security benefits issue is probably a red herring. I can't imagine a scenario in which the combined income tax and FICA/Medicare tax savings doesn't outwiegh the present value of any decrease in social security benefit.

Disability insurance is another story. If the maximum LTD coverage is 60% of pay, paying for the coverage with after-tax dollars can be a very good investment. But the answer to the original question is "yes," the employer can design the 125 plan so that it's either pre-tax or nothing.