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George Saenz, the Bankrate.com Tax Talk columnistEmployer should spring for cafeteria plan

Dear Tax Talk,
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 taxes.

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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?
-- Ken

Dear Ken,
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 your employer.

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.

Bankrate.com's corrections policy -- Posted: Jan. 31, 2006
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