Calculate your tax savings by paying health insurance premiums with pre-tax dollars through an employer plan.
Plan Details
Calculate your pre-tax savings
Understanding Pre-Tax Premiums
How Section 125 plans save you money
Triple Tax Savings
When premiums are deducted pre-tax, you lower your taxable income for: 1) Federal Income Tax, 2) Social Security & Medicare (FICA), and 3) Most State Income Taxes.
Buying Power
Paying $100 for insurance through your employer costs you less "take-home pay" than buying a $100 plan on your own because you'd have to earn ~$130 to have $100 left after taxes.
Methodology
Total Tax Rate = Federal Rate + State Rate + 7.65% (FICA)
Ordinarily, you earn money, the government taxes it, and you spend what is left. This is "post-tax" spending.
A Premium Only Plan (POP), authorized under IRS Section 125, flips this script for specific expenses. You agree to reduce your salary by the amount of the premium, and in exchange, your employer pays the insurer directly.
Example: You earn $5,000/month. Your insurance is $500. Without Section 125: You are taxed on $5,000. Then you pay $500. With Section 125: You are taxed on $4,500. The $500 effectively disappears from the IRS's view.
2. The "Triple Tax Shield" Explained
Most people know about Federal and State savings. The hidden gem is FICA.
Shield 1: Federal Income Tax (10% - 37%)
Depending on your bracket, you save anywhere from 10 cents to 37 cents on every dollar of premium.
Shield 2: State Income Tax (0% - 13%)
Most states conform to federal definition of taxable income. If it's pre-tax federal, it's usually pre-tax state (with some exceptions like NJ or PA for certain items).
Shield 3: FICA (7.65%)
This is the game changer. 401(k) contributions are exempt from income tax but NOT FICA. You still pay Social Security/Medicare on your 401(k) money.
Health insurance premiums are exempt from FICA. This is a flat 7.65% guaranteed return (6.2% Social Security + 1.45% Medicare) for almost everyone.
3. Employer Plans vs. Marketplace (Post-Tax)
When comparing job offers or deciding between an employer plan and a spouse's plan, you must compare "apples to apples."
Feature
Employer Plan (Section 125)
Private/Marketplace Plan
Payment Source
Pre-Tax Dollars
Post-Tax Dollars
Tax Deduction
Automatic & Instant (100%)
Only if itemizing >7.5% AGI
FICA Savings
Yes (7.65%)
No
Real Cost of $500
~$350 (depending on bracket)
$500 + expected earnings tax
4. Impact on Social Security Benefits
It is fair to ask: "If I pay less Social Security tax, will my benefits be lower when I retire?"
Technically, Yes. Practically, No.
Social Security is calculated based on your "Average Indexed Monthly Earnings" (AIME) over your highest 35 earning years. Reducing your reported income slightly via health premiums might lower your eventual payout by a few dollars a month. However, the immediate cash savings (7.65% now) can be invested. If you invested those tax savings into a Roth IRA, the growth would likely far outpace the marginal reduction in Social Security benefits.
5. Locked In: Qualifying Life Events
The IRS imposes strict rules on Section 125 plans. Because the election has tax consequences, you cannot just drop coverage whenever you want.
You can only change your election during Open Enrollment or a Qualifying Life Event (QLE). Common QLEs include:
Marriage or Divorce.
Birth or Adoption of a child.
Spouse losing their job or insurance coverage.
Your child turning 26 and aging off the plan.
Moving to a new zip code (if it affects plan availability).
6. Tips to Maximize Savings
1. Stack with FSA/HSA: Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA) are also Section 125 benefits. Contributions avoid Federal, State, and FICA taxes. Maxing these out is the most tax-efficient way to pay for medical care.
2. Check Spousal Surcharges: Some employers charge an extra fee (post-tax or pre-tax) if your spouse has coverage available elsewhere. Calculate the effective cost carefully.
3. Don't Over-insure: Since you are paying with pre-tax dollars, a higher premium "High Option" plan feels cheaper than it is. Don't buy a Platinum plan if a Bronze plan coupled with a robust HSA contribution leaves you wealthier at year-end.
Disclaimer: This article is for educational purposes. Tax laws are complex and subject to change. State laws vary (e.g., California, New Jersey). Consult a CPA or tax professional for advice specific to your financial situation.
Frequently Asked Questions
Common questions about payroll deductions
What is Section 125?
It's the IRS code that allows Premium Only Plans (POP), letting employees pay insurance premiums with tax-free dollars.
Does this lower my salary?
Technically, it lowers your *taxable* salary, which is good for taxes. It does not affect your base pay rate.
Can domestic partners covered?
Usually, no. Unless your domestic partner qualifies as a tax dependent, the portion of the premium for them is taxable income (imputed income).
What about FSA/HSA?
These are also pre-tax! Adding FSA or HSA contributions to your premium deductions further lowers your taxable income.
Do all employers offer this?
Most do, but small businesses aren't required to set up Section 125 plans. Ask your HR department if your premiums are pre-tax.
Can I change this anytime?
No. Because of the tax status, you can only change elections during Open Enrollment or a Qualifying Life Event (marriage, birth, etc.).
Effect on tax refund?
Since you pay less tax throughout the year, your refund might be slightly smaller, but your weekly take-home pay is higher.
Is Life Insurance pre-tax?
Group term life up to $50,000 is usually pre-tax. Coverage above that is often imputed income and taxable.
Summary
This calculator demonstrates the significant tax advantages of employer-sponsored health plans paid via pre-tax payroll deductions.
By bypassing Federal, State, and FICA taxes, the effective cost of your health insurance is often 20-40% lower than the sticker price.
Use this "effective monthly cost" to make fair comparisons when weighing job offers or private insurance alternatives.
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Calculate your tax savings by paying health insurance premiums with pre-tax dollars through an employer plan.
How to use Employer Health Plan Tax Savings Calculator
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Frequently asked questions
How do I use the Employer Health Plan Tax Savings Calculator?
Simply enter your values in the input fields and the calculator will automatically compute the results. The Employer Health Plan Tax Savings Calculator is designed to be user-friendly and provide instant calculations.
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Are the results from Employer Health Plan Tax Savings Calculator accurate?
Yes, our calculators use standard formulas and are regularly tested for accuracy. However, results should be used for informational purposes and not as a substitute for professional advice.