Understanding Voluntary Life Insurance: Pre Or Post-Tax?

Voluntary life insurance is a type of life insurance that is optional and can usually be purchased in addition to a guaranteed issue group life policy offered by an employer. It is also called supplemental life insurance or optional life insurance. Membership organizations and labour unions also sometimes offer voluntary life insurance. The cost for this type of insurance is typically deducted pre-tax from an employee's paycheck. However, if the death benefit exceeds $50,000, the amount over $50,000 must be paid post-tax.

Pre-tax vs. post-tax benefits: pros and cons

Pre-tax and post-tax benefits both have their advantages and disadvantages. This article will outline the pros and cons of each to help you understand the differences and determine which option is best for your employees.

Pre-tax benefits

Pre-tax benefits are deducted from an employee's paycheck before income and employment taxes are applied. This lowers the total income amount taxed, reducing the income taxes the employee must pay.

Pros:

• Pre-tax deductions provide an immediate tax break for employees.
• Pre-tax benefits lower tax liabilities for both employers and employees.
• Pre-tax benefits can be used to reduce an employee's taxable income, resulting in a lower amount of federal income tax owed.
• Reimbursements from pre-tax plans for qualified medical expenses are often tax-free.

Cons:

• Pre-tax deductions may impact an employee's taxable income, and they may owe taxes in the future when they use the benefit.
• Pre-tax benefits may not be exempt from all federal, state, and local taxes.
• Taxes could be owed down the road when the benefits are used.

Post-tax benefits

Post-tax benefit contributions are taken from an employee's paycheck after taxes have already been deducted. This means the employer and employee will owe more in income and employment tax, but the employee generally won't owe any income tax on the benefits when they use them.

Pros:

• Post-tax deductions do not reduce overall taxable income, but they can provide tax relief in the future when benefits are used.
• Post-tax benefits may result in savings in the future.
• Post-tax benefits do not reduce an employee's taxable income, so there is no impact on their current taxes.

Cons:

• Post-tax benefits do not provide immediate tax breaks like pre-tax benefits.
• Post-tax benefits result in higher income and employment taxes for both employers and employees.

Voluntary life insurance

Voluntary life insurance is typically paid for through payroll deduction using pre-tax dollars. The premiums are usually not taxable if the death benefit is less than $50,000. However, if the death benefit exceeds $50,000, the excess coverage must be paid post-tax.

In conclusion, both pre-tax and post-tax benefits have their advantages and disadvantages. Pre-tax benefits offer immediate tax breaks, while post-tax benefits provide future tax relief. The best option for your employees will depend on their individual financial situations and needs.

Pre-tax benefits and tax liabilities

Voluntary life insurance is typically paid for through payroll deduction using pre-tax dollars. This means that premiums are deducted from an employee's paycheck before any taxes are withheld. While pre-tax deductions provide an immediate tax break for employees, they do impact an employee's taxable income. This means that the employee might owe taxes in the future when they use the benefit the deduction was applied toward.

In the context of voluntary life insurance, if the death benefit is less than $50,000, the employee's premiums are usually non-taxable. However, if the death benefit exceeds $50,000, the value of the coverage over $50,000 must be included in the employees' incomes and is therefore taxable.

It is worth noting that not all pre-tax benefits are exempt from all federal tax withholdings. For example, while adoption assistance is exempt from federal income taxes, it is not exempt from Social Security, Medicare, or FUTA tax. Similarly, pre-tax benefits may not be exempt from all state and local taxes, so employers should be diligent in checking their state and local laws to determine which benefits are exempt.

Pre-tax deductions lower tax liabilities for both employers and employees. However, as previously mentioned, they can also have future tax implications. For example, an employee who retires will owe taxes when they withdraw money from a pre-tax 401(k) plan.

In contrast, post-tax benefit contributions are taken from an employee's paycheck after taxes have already been deducted. While post-tax deductions do not provide immediate tax relief, the employee will not owe any income tax on the benefits when they use them in the future.

Post-tax benefits and future tax savings

Voluntary life insurance is often paid with pre-tax dollars, but it can also be paid with post-tax dollars, which may come with certain benefits and tax savings.

Benefits of Post-Tax Payments

Firstly, it is important to note that not all plans are eligible for pre-tax deductions under the IRS Code Section 125. Accident and Health Coverage, as well as individual insurance contracts that qualify as group term life insurance, are the only two categories of individual policies that may be deducted on a pre-tax basis.

Therefore, if an employee's voluntary life insurance does not fall under these two categories, they will have to pay with post-tax dollars anyway.

Future Tax Savings

If voluntary life insurance is paid with post-tax dollars, the premium costs may be tax-deductible. In addition, if the insured passes away with the policy intact and up to date, the beneficiaries will generally receive the death benefit tax-free.

Pre-tax and post-tax: common examples

Pre-tax and post-tax deductions are wages withheld from an employee's total earnings for the purpose of paying taxes, garnishments, and benefits. Pretax deductions are taken from an employee's paycheck before any taxes are withheld, while post-tax deductions are taken from an employee's paycheck after all required taxes have been withheld.

Pre-tax deductions

Pre-tax deductions reduce an employee's taxable income and the amount of money owed to the government. They also lower an employer's Federal Unemployment Tax (FUTA) and state unemployment insurance dues. Examples of pre-tax deductions include:

• Health insurance plans
• Health reimbursement arrangements (HRAs)
• Health savings accounts (HSAs)
• Retirement plans
• Commuter benefits

Post-tax deductions

Post-tax deductions reduce an employee's net pay and do not lower their overall tax burden. Examples of post-tax deductions include:

• Stipends
• Post-tax retirement plans (Roth IRA and certain 401(k) accounts)
• Disability insurance
• Wage garnishments
• Life insurance premiums (if the policy's death benefit exceeds $50,000)

Voluntary benefits: affordability and customisation

Voluntary benefits are a critical component of engaging employees and helping them manage direct and indirect medical expenses. They are also an important tool for attracting and retaining talent.

Affordability

Voluntary benefits are optional services or products offered by employers to their workers, often at discounted rates. They are not part of the standard benefits provided but are instead supplementary and customisable. They are also affordable for employers, who can increase their benefit offerings without a lot of extra costs. In fact, employers may only pay administrative fees and minor ancillary costs, such as time spent by HR staff to communicate and educate employees about the offering.

Employees also benefit financially. They can elect the benefits that serve them and, based on what the employer offers, may pay part or all of the premium. The cost for employees varies widely, depending on the type of benefit and any associated premiums. But because participation is optional, employees have the flexibility to mix and match the benefits they want and can afford.

Customisation

Voluntary benefits can be customised to meet the diverse needs of employees. They can encompass a wide range of areas, from financial to mental health to personal benefits to identity security. Examples include student loan repayment assistance, employee assistance programs (EAPs), and even pet insurance.

Employers can also bundle services for preferred pricing options, especially for group and medical lines such as life, disability, medical and dental insurance.

Frequently asked questions