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During this period, many employers stopped providing health benefits entirely. The percent of jobs that included health benefits fell to 61 percent—6 percent (or 5 million) fewer U.S. jobs provided health benefits in 2004 versus 2001.
Should You Get Your Own Individual/Family Health Insurance Policy?
Let's say that the total premium charged by a health insurance company to include you in your employer-sponsored group policy is $4,000 a year, or $333 a month. The cost to you to buy an individual policy (if you are a healthy male) with roughly the same benefits is considerably less, especially if you are younger.
However, if you are less under age 60, you are probably thinking: “How can I get my employer to give me the $333 a month, let me buy my own individual policy, and keep the difference?” I explain how to do this in the remainder of this chapter and in Part II.
Should You Keep Your Company Plan for Yourself but Get Your Spouse and Children Their Own Individual/Family Plan?
 You are probably paying 25 to 100 percent of the cost of including your spouse and dependents on your company health plan—without realizing it, since it is automatically deducted from your pretax wages. Unlike the decision to get yourself your own individual policy, getting your spouse and dependents their own policy is an easier choice to make, since it will probably end up saving you money today in addition to saving you money tomorrow.

Group versus Family Policy Premium/Month, Sacramento, California

Age (spouse)

25

35

45

55

60
Employer group policy

$666

$666

$666

$666

$666
Family policy

$215

$264

$345

$467

$551
Monthly savings ($)

$451

$402

$321

$199

$115

Annual savings ($)

$5,412

$4,824

$3,852

$2,388

$1,380

How to Buy Your Own Individual/Family Policy—Tax-Free
If your employer allows you to fund your employee contribution of $666 a month with pretax dollars (with a Section 125 POP plan, explained subsequently), then your after-tax cost is 35 percent less than the full $666 amount ($666 – 35% = $433) that is withheld from your pretax wages (assuming 35 percent combined state and federal tax bracket). Most large employers offer this option to their employees.

However, you may be able to make the monthly premium you pay for your individual/family policy equally tax deductible—in which case you could directly compare this monthly premium to the $666 pretax amount being withheld from your wages. The monthly premium of the policy you purchase for your spouse and children is deductible (or nontaxable) if:

  • Your spouse has self-employed income equal to at least the annual premium cost (e.g., $8,000 per year). Since 2003, self-employed individuals are allowed a 100 percent deduction from their income for individual/family health insurance premiums, up to the amount of their self-employed income.
  • Your employer allows you the option to switch your benefits to an HRA plan under which, in lieu of or in addition to your group benefits, you are reimbursed tax-free for out-of-pocket medical expenses, including individual/family insurance premiums (see HRAs discussion later in the chapter).

$$$ Tip: If you've been thinking about starting a home-based or family business, this might be the ideal time, since the first $8,000 of income would effectively be tax-free if the business is in the name of your spouse.

How Your Employer's “Cafeteria Plan” (Section 125 Plan) Works
 Employers are allowed to provide tax-free employee health benefits under what are commonly known as either “Section 125 plans” or “cafeteria plans.” The term cafeteria refers to the recent development among larger employers of allowing employees to choose among a limited list of benefit options.

The income tax savings, as described in Chapter 1, is the primary reason employer-sponsored health benefits exist in the first place. When an employer contributes 100 percent of a $14,000 annual family premium contribution, using a Section 125 plan saves the employer $9,186 in extra wages and FICA (Social Security and Medicare taxes) that would have been necessary to net the employee the same $14,000 benefit. When employees contribute 100 percent of the $14,000 premium themselves, using a Section 125 plan saves the employee $4,900 and additionally saves the employer $1,071 in FICA.

Flexible Savings Accounts (FSAs)
Because they have been around since 1978, FSAs are the most common tool offered by employers today to help employees fund their out-of-pocket and optional medical expenses with pretax dollars. But FSAs are outdated. FSAs encourage waste due to their IRS-mandated “use it or lose it” feature, and FSAs cannot be used to fund premiums for individual/family policies. Here's the catch for you. If by 2 ½ months following December 31 or the end of your plan year, you have not spent the full $4,800 in your Medical FSA and the full $5,000 in your Dependent Care (day care) FSA, you forfeit any unspent amounts in each FSA to your employer. Thus, you should never elect to contribute any amount to an FSA that you don't foresee yourself spending in the coming year. This is typically called “use it or lose it.”

Now, here's the catch for your employer. Your employer must allow you access to the full amount in your Medical FSA beginning January 1, even if you haven't yet made a single monthly contribution. If you spend the full amount of $4,800 in January and then quit before you've paid in your full $4,800 annual contribution, your employer is out the $4,800 (less any of your monthly contributions) and cannot seek restitution from you for the balance.

This might seem like a dirty trick when done deliberately, but you might feel justified using it when you consider that employers effectively get to keep unspent FSA balances. For example, in October 2005 you elect to have $4,800 contributed to your Medical FSA in the next calendar year. In January 2006 you have LASIK surgery for $2,000 and dental work for $2,800, draining your entire $4,800 FSA before you've made a single contribution. You switch to a new employer in late January and your former employer is out up to $4,800.
 

  
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New Health Insurance Solutions for individuals, families, self-employeds, and businesses.

  



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