HRAs and more
August 2, 2023

Pre-Tax Versus Post-Tax? Maximize Your Health Benefits with this Easy Step

Let’s get stretchy with those health benefit dollars.
Ellen Decareau
A one-dollar bill is split almost in half to show what is left after taxes.

Key takeaways

Your small business has a rockstar team, and you want to take care of your employees by offering health insurance. Small group health plans are too costly and complicated, so you’ve opted to give your people some extra dough each month to go toward their health insurance premiums.

While it seems like a great perk, let's take a closer look to see if those dollars are really stretching as far as you'd hope.

The hidden impact of taxes: 35% or more

Let’s say you decide to give your employees an extra $200 each month (totaling $2,400 per year) to help with their health insurance premiums. The amount they can actually use is a lot less, thanks to those pesky payroll and income taxes. How much so?

Here’s a general breakdown:

FICA tax: 15.3%

The FICA tax (Federal Insurance Contributions Act tax) is a mandatory payroll tax that funds two social insurance programs:

  • Social Security: This provides retirement, disability, and survivor benefits. Tax rate = 12.4%.
  • Medicare: This program provides healthcare coverage to the elderly and certain disabled individuals. Tax rate = 2.9%.

While the total tax is 15.3%, the amount is split between the employer and the employee and is typically withheld from their paychecks.

Income tax: 22% (average)

The federal income tax is a progressive tax meaning the tax rate increases as a taxpayer's income rises. In other words, the higher an individual's income, the higher the percentage of their income they are required to pay in taxes. Generally speaking, a salary of $100,000 is taxed at 22%, which is the figure we used for this example, but it could be more or less depending on your household income and credits.

Other taxes:

Taxes are different depending on your state, city, or household income. For instance, if you lived in Chicago, Illinois, your pay would be subject to a flat state tax rate of 4.95%.  In Denver, Colorado, the tack-on is 4.4%. With 43 of 50 states imposing a state income tax, chances are post-tax dollar contributions will be subject to more taxes than FICA and federal income tax.

A map of the USA showing hat the individual income tax rates are in each state
Credit to the Tax Foundation for this nifty graphic.

So what does this all mean for your employees? The actual amount that hits an employee’s bank account with a post-tax contribution is a lot less than you think. The good news is that there are ways you can take advantage of pre-tax healthcare options to maximize benefits (and tax advantage).

Health Reimbursement Arrangements (HRAs), specifically one like what StretchDollar offers (called an ICHRA), allow you to give pre-tax dollars toward health insurance premiums, encouraging employees to get a health plan and also get more for their buck (so to speak.) Love your group plan? Health Savings Accounts give you the option of gifting pre-tax dollars toward your employees’ healthcare costs associated with high deductible health plans. Learn more about HRAs vs HSAs.  

The power of pre-tax contributions

Making the switch to pre-tax contributions not only puts more money in your employees' hands but also helps you stretch your benefits budget.

So, let's recap: pre-tax contributions are like a secret code that unlocks more value for both you and your employees. Your team gets the full benefit amount, and you get to keep some extra dollars in your pocket. It's a win-win situation that fosters a happier, healthier, and more motivated workforce.

A dollar bill split to show what percentage of a dollar is removed for taxes.

Want to learn more about StretchDollar pre-tax fixed benefit? Check out How it Works.

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