should spring for cafeteria plan
Thanks to George Saenz for his helpful "Deductible
health insurance premiums" article.
I work for a small company that does not provide health insurance
benefits, so I purchased my own family health insurance with a $2,000
deductible. Our premiums are about $3,000 per year. In 2005 our
nonpremium medical expenses were less than $2,000, so our total
medical expenditures were a little less than $5,000, which just
happens to be 7.5 percent of our adjusted gross income (AGI). This
means we cannot deduct any of our insurance premiums for our 2005
As I understand it, employees of companies that provide health insurance
benefits are not taxed for those benefits, (i.e., the benefit is
not reported in their earnings).
This situation seems fundamentally flawed. Not only does my employer
not provide an insurance benefit, but I am taxed on the insurance
that I have to purchase as a result, while those who receive such
a benefit are not taxed for it! Can this be true? Am I missing something?
If the IRS does not tax employer-based health insurance premiums,
then why do they tax those of us who must pay for our own policies?
I don't make the rules; I just report on them. And it's not the
IRS that unfairly taxes you, it's the Congress that makes the rules
that the IRS administers. But the real issue should be with your
small employer that does not offer you any benefits for which Congress
has provided preferential tax treatment. If your employer would
just set up a simple premium-only cafeteria plan, for a few dollars
a year in administration costs you could save on taxes and so could
Under a premium-only plan, or POP, you would defer
$3,000 of compensation that would allow your employer to purchase
the health insurance you currently have. The employer would save
the FICA tax of 7.65 percent on the $3,000 you contribute to the
POP and the same percentage on what other employees defer as well.
You would also save the 7.65 percent payroll tax, plus the income
tax on $3,000.
I suggest you talk to your boss and have him get with
his accountant to discuss how the company can keep the employees
happy and still control costs.