How Do I Get Pretax Health Insurance?

You can take advantage of health insurance on a tax-free basis through a combination of employer-paid health care benefits, pretax payroll deduction for health insurance premiums, Health Savings Accounts (HSAs), Health Reimbursement Arrangements (HRAs) and Flexible Spending Accounts (FSAs). If self-employed, you may also be eligible for tax-free insurance benefits, but the tax break occurs in the form of a deduction on income tax returns after the expenditures have occurred.

Employer Benefits

• Many companies pay a portion of health insurance premiums for their employees. Unlike salary, health insurance premiums are a form of compensation currently treated as a tax-free benefit, according to CNNMoney.com. If your employer is paying a portion of your health insurance premiums, you are already receiving some tax-free benefits.

  Employers who offer health insurance benefits often do not pay 100 percent of the costs and employees must pay a portion of those premiums themselves. If available, it's smart to take advantage of a pretax payroll deduction plan to pay these premiums. Sometimes called a "cafeteria plan," this is essentially a salary reduction agreement meeting the requirements of Section 125 of the Internal Revenue Code. Because you never actually receive the contributions, the federal government does not view them as taxable wages. The pretax deductions are usually exempt from FICA and FUTA taxes as well, according to the IRS.

  A Flexible Spending Account is another Section 125 plan that enables individuals to receive tax-free insurance benefits. FSAs allow you to contribute a fixed amount of pretax income each year to a special account. You may draw from that account to reimburse medical expenses not covered by the employer's health care plan. Those expenses can include deductibles, co-pays, prescription drugs, and certain over the counter medical devices such as blood glucose monitors and diabetes test strips. FSAs are subject to a "use-it-or-lose-it" rule. The amount you contribute to the account each year cannot be rolled over into the following year.

  If you are enrolled in a health care plan with a higher than average deductible, you may qualify for a HSA to help cover expenses. An HSA is a tax-exempt account you establish with a trustee such as a bank or insurance company. You can exclude employer contributions from your gross income and claim a tax deduction for contributions you make to the account. Any interest earned is tax-free and assets may be rolled over from one year to the next.

  A Health Reimbursement Arrangement is entirely employer-funded. You can exclude contributions from your gross income and carry assets over into the next year. An HRA allows you to receive tax-free reimbursement for qualified medical expenses.

Benefits for Self-Employed

• Self-employed individuals who earned a net profit during the year may sometimes deduct medical expenses when filing their income tax return. However, you may not take deductions for any period of time during which you are eligible to participate in a health insurance plan offered by another employer or a spouse's employer, according to the IRS.

Potential Changes

• Health care reform efforts may change the tax-free nature of employer-paid health care benefits in the not too distant future. As of 2010, the government places few limits on the amount an employer can contribute to cover employees' health insurance premiums. These tax-free benefits represent the federal government's largest loss of potential tax revenue, reports CNNMoney.com. Some lawmakers have proposed taxing employer-paid insurance premiums or placing a limit on the amount that qualifies for tax exemption.