Alyssa Lane
Whether medical insurance increases or decreases after taxes depends on a variety of factors, including the type of insurance plan, the source of the plan, and the individual's income tax bracket. In the United States, employer-sponsored health insurance plans typically offer pre-tax premium deductions, where premiums are deducted from an employee's paycheck before income or payroll taxes are withheld. This can result in significant tax savings of up to 40% for the employee. On the other hand, if an individual chooses to opt out of their employer's pre-tax plan or if their employer does not offer one, they may have to pay for their insurance with after-tax dollars, which can increase their overall cost. Additionally, certain medical expenses may be deductible from taxable income, provided they meet certain criteria and are paid for with after-tax earnings.
| Characteristics | Values |
|---|---|
| Pre-tax medical premiums | Health insurance premiums deducted from your paycheck before your employer withholds income taxes or payroll taxes |
| After-tax medical premiums | An option if an individual doesn’t want to participate in their employer's pre-tax plan or if their employer doesn’t offer a pre-tax plan |
| Premium-only plan (POP) or a Section 125 cafeteria plan | Employer deducts insurance premium contributions from your payroll on a pre-tax basis |
| Pre-tax health benefit savings | Up to 40% on income and payroll taxes |
| Tax exclusion for employer-sponsored health insurance | Lowers the after-tax cost of health insurance for most Americans |
| Premium tax credit | A tax credit to lower your monthly insurance payment |
| Medical expense deduction | Deductible if they were paid for with after-tax earnings |
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What You'll Learn
Pre-tax medical premiums
To benefit from pre-tax medical premiums, you must be enrolled in your employer's health insurance plan. Employer-sponsored plans with qualifying pre-tax premiums include healthcare spending account contributions, such as health savings accounts (HSAs) and flexible spending accounts (FSAs). You can confirm if your health premiums are pre-tax by viewing your pay stub and looking for a column titled "Deductions" or something similar. If your health premium is in this column and your employer deducts it from your gross pay, it's a pre-tax premium.
Your employer may also offer you tax-free employee benefits, such as a health reimbursement arrangement (HRA). While employees don't contribute to an HRA, all reimbursements for qualifying medical expenses, including insurance premiums, are tax-free as long as you have minimum essential coverage (MEC). With an HRA, employees can choose the health plan they want or need. A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is available for small employers not required to purchase company health insurance under the Affordable Care Act (ACA). A small employer under the ACA is defined as one with fewer than 50 full-time equivalent (FTE) employees. With a QSEHRA, employers can reimburse up to $6,350 for single employees or $12,800 for family coverage in 2025.
In contrast, after-tax medical premiums are an alternative option if an individual doesn't want to participate in their employer's pre-tax plan or if their employer doesn't offer a pre-tax plan. After-tax medical premiums are deducted from your paycheck after income taxes and payroll taxes have been withheld. Unless you have one of the eligible healthcare spending accounts, any copays, prescription costs, and payments made before meeting your deductible are also considered after-tax medical expenses.
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After-tax medical premiums
The tax treatment of medical insurance premiums varies depending on whether they are paid on a pre-tax or after-tax basis. Pre-tax medical premiums are deducted from an employee's paycheck before their employer withholds income taxes or payroll taxes and are then paid to the insurance company on the employee's behalf. On the other hand, after-tax medical premiums are paid with after-tax dollars, and individuals can deduct their medical premiums on an after-tax basis.
Self-employed individuals who purchase health insurance on their own may also be eligible for tax deductions on their premiums. This is considered an adjustment to income rather than an itemized deduction. To claim this deduction, self-employed individuals must have a net profit for the year and can include premiums paid for a health insurance policy covering medical care for themselves, their spouse, and dependents. Additionally, if they do not claim 100% of their paid premiums, they can include the remainder as an itemized deduction on Schedule A (Form 1040).
Another option for individuals to benefit from both pre-tax and after-tax advantages is through a standalone Health Reimbursement Arrangement (HRA), such as a Qualified Small Employer HRA (QSEHRA) or an Individual Coverage HRA (ICHRA). In this case, individuals purchase an individual health insurance plan with their own money and then receive tax-free reimbursements from their employer for their monthly premiums and other eligible out-of-pocket medical expenses up to a set allowance. This allows employees to choose a plan that best suits their needs and maintain the flexibility to take the insurance plan with them if they leave their employer.
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Tax credits
The Premium Tax Credit (PTC) is a refundable tax credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace. The size of the PTC is based on a sliding scale, with those who have a lower income receiving a larger credit to help cover the cost of their insurance. The PTC is available immediately upon enrollment in an insurance plan, so that families can receive help when they need it rather than having to wait until they file their taxes.
To receive a PTC, individuals must be US citizens or lawfully present in the United States. They cannot receive a PTC if they are eligible for other "minimum essential coverage," including most other types of health insurance such as Medicare or Medicaid, or employer-sponsored coverage that is considered adequate and affordable.
The PTC enhancements have helped drive a record 21.4 million people to sign up for marketplace coverage in 2024, which is nearly twice as many as in 2021. The enhancements have been especially critical for increasing enrollment among Black and Latino people. People of color made up the majority of marketplace enrollees for the first time in 2023.
The American Rescue Plan Act increased the size of the credits and made more people eligible for them beginning in the 2021 coverage year. The Inflation Reduction Act extended these enhancements through the end of the 2025 coverage year. However, if Congress does not act, the enhanced PTCs are set to expire after 2025, which will result in significantly higher premium costs for nearly all marketplace enrollees.
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Deductibles
A deductible is a set amount that you must pay out-of-pocket for your healthcare before your insurance coverage starts to share the costs. In other words, it is the amount you pay for health care services before your health insurance begins to pay. For example, if your health plan's deductible is $1500, you will pay 100% of eligible health care expenses until your bills total $1500. After that, you will share the cost with your health plan by paying coinsurance.
There are two types of health insurance deductibles: individual and family deductibles. An individual deductible applies to individual health insurance plans and covers only one person. A family deductible applies to family health insurance plans and covers the entire family's medical expenses. Once the family reaches the total deductible amount, the insurance coverage starts sharing the costs.
High Deductible Health Plans (HDHPs) have higher deductibles, requiring individuals to pay more out-of-pocket before insurance coverage starts. On the other hand, Low Deductible Health Plans offer lower deductibles, resulting in lower upfront costs for medical services but higher monthly premiums. As a general rule, the higher the deductible, the lower the premium, and vice versa.
It is important to note that even after reaching your deductible, you may still have to pay some separate expenses for your healthcare, commonly known as "out-of-pocket costs". These include the premium, copay or coinsurance, and out-of-pocket maximum. The premium is the amount you pay each month for your plan, while copay or coinsurance refers to specific cost-shares when you receive care, such as a $10 copay or 20% coinsurance. The out-of-pocket maximum is the most you will pay for allowed health care costs in a plan year, after which your plan pays 100% of your care.
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Employer-sponsored health insurance
There are several ways to get private health insurance, and one of them is employer-sponsored health insurance. When an individual is sponsored by an employer, it is often referred to as employer-sponsored health insurance or ESI. The word "insurance" is a misnomer here, as an employer providing health benefits for workers and their families can fund them in one of two ways. Firstly, the employer can self-insure, which means that the employer pays employees' medical claims with their own money, rather than purchasing coverage from an insurance company. Most self-insured plans contract with an insurance company to administer the coverage. Secondly, the employer can offer an ICHRA, under which they reimburse employees for some or all of the costs of obtaining individual market coverage.
Under the Affordable Care Act (ACA), employers with at least 50 full-time equivalent employees (FTEs) are required to offer health benefits that meet minimum standards for value and affordability or pay a penalty. This is known as the "employer mandate". The ACA also includes provisions that prevent employers from imposing a waiting period of more than 90 days before new employees are eligible for their health benefits.
Employees can make premium contributions on a pre-tax or after-tax basis. Pre-tax medical premiums are deducted from an employee's paycheck before any income taxes or payroll taxes are withheld. This can save individuals up to 40% on income and payroll taxes. After-tax medical premiums are an alternative option if an individual doesn't want to participate in their employer's pre-tax plan or if their employer doesn't offer one.
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Frequently asked questions
Medical insurance premiums are often deducted from an employee's paycheck before income taxes or payroll taxes are withheld. This is called a pre-tax premium. Alternatively, if an individual doesn't want to participate in their employer's pre-tax plan, they can opt for an after-tax premium, where they pay the full cost of the premium and then deduct it from their taxable income.
Enrolling in your employer's pre-tax plan can save you up to 40% on income and payroll taxes. Additionally, you may be able to take advantage of tax credits or deductions to lower your insurance costs.
Pre-tax medical premiums are deducted from your paycheck before taxes, while after-tax medical premiums are paid in full by the individual and then deducted from their taxable income. Pre-tax premiums are typically only available for employer-sponsored plans.
Yes, many medical expenses are deductible, but you must meet certain requirements. You must itemize your taxes and have paid for the expenses out-of-pocket (after-tax). Additionally, your unreimbursed medical expenses must exceed 7.5% of your adjusted gross income (AGI) for the year, and only expenses above this threshold can be deducted.
You can check your pay stub or W-2 form to see if the cost of your health insurance is included. If it is, then it is likely a pre-tax premium. For after-tax premiums, you typically pay the insurance company directly rather than through payroll deductions.
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