About Pre-Tax Health Insurance Plans

Health insurance plans come in many types, including plans that use pre-tax dollars which is known as a pre-tax health insurance plan or a cafeteria plan. This is the only type of plan that an employer can use to offer employees an option to choose between benefits that are taxed or non-taxed without causing non-taxed benefits to become taxable. A pre-tax health insurance plan needs to meet requirements of Section 125 of the Internal Revenue Code (see Resources).

Benefits

• A pre-tax or cafeteria plan can have many types of qualified benefits for employees, dependents, spouses and even former employees. These can include accident and health benefits, assistance for adoptions, assistance for dependent care, coverage for group life insurance as well as a health savings account. Employers that want to set up a pre-tax health insurance plan must specify all benefits as well as have rules in place for eligibility and election.

Premium Conversions

• A premium conversion is an option that is included with many types of pre-tax plans. This is when an employee's pre-tax dollars are used to contribute to family health care costs. An employee will need to estimate from year to year the total amount that will be needed for health-related expenses. When this happens an employee's take-home pay is reduced by the amount that is used to contribute to the pre-tax plan.

Flexible Spending Arrangement

• A pre-tax plan also includes an option for a medical and dependent care reimbursement account. These types of accounts are referred to as a flexible spending arrangement. This means that an employee can use pre-tax dollars to pay for specific out-of-pocket expenses. The pre-tax health plan will then reimburse the employee for certain types of qualified expenses as defined by the plan.

Health Care Reimbursement Account

• A health care reimbursement account or HCRA is an account in which pre-tax dollars are deposited to pay for certain types of medical expenses that are not covered by insurance. Expenses can include chiropractors, dental work, birth control and vision care. A pre-tax plan offered by an employer may place a limit on an employee's contribution, but the law does not set any limit amounts.

Use It or Lose It Provision

• A pre-tax or Cafeteria plan has a provision known as "use it or lose it." This means that the amount of pre-tax dollars that have been used to contribute to the plan does not roll over from year to year. If there is an outstanding balance in a pre-tax plan and it is not used by the end of the year the amount left over is forfeited. However, the IRS has loosened the rules for this provision by allowing funds to be used for up to two years and fifteen days after the benefit year has ended.