Expensive Pre-Tax Health Plan or Cheaper After Taxes Private Insurance

Question

I currently have two options for health insurance, and I'm having trouble figuring out which one will actually save me more money.

Option 1:

• Employer sponsored Health Insurance for Family
• $1,330/month (pre-tax deduction)
• Reduces my taxable income by $15,960

Option 2:

• Employer sponsored Health Insurance for Self
• $127/month (pre-tax deduction)
• Reduces my taxable income by $1,524

AND

• Private Insurance for Family (employer doesn't subsidize for family)
• $600/month (paid for with taxed income)
• Not sure if I can deduct on taxes ... see my other question

The Question

So, given the two above scenarios, which one will net me more money? The pre-tax plan significantly reduces my taxable income, but it's expensive. The second plan barely reduces my taxable income and is a little less than half the cost.

Is there an easy way to calculate the net difference between these two approaches so I can make a smart decision?

Also, it is important to note that we cannot go with an HSA at this time because we're planning on having more children and need maternity coverage.

Thanks in advance for your help!

Answer 1

You need to determine what the coverages are for each of these plans, and more important, which coverage is a better match for your needs. I am thinking specifically of the following three, which will vary depending on your particular situation:

1. Co-pay Who has more medical provider visits, you or your family members? Any specialty providers that you want to ensure that you can get covered by your insurance plans? Choices vary.
2. Formulary coverage Do you or any of your family members take any expensive, or even generic medications for chronic conditions or as part of a long-term treatment program? If so, that will be very important in determining which plan, as not all plans provide coverage of the same medications, nor at the same rates.
3. Dental plan Do any of these plans include dental insurance? For example, your option 2, private insurance for the family, does that pay for dentist visits? I could see that being important with children. Maybe for you too. And if so, does your plan from work cover that.
4. Yearly frequency or service amount cap's Many plans have limits on the number and/or amount of certain services that are allowed per year. This varies a lot by plan. Check on this, to ensure that you don't choose a plan that doesn't offer enough of the type of provider services that you or your family need the most.

I would suggest making a spreadsheet comparison of your options, but only after determining the amount of tax deductibility as well as the cost of each plan. Break it down on a monthly basis. Next, assess what sort of usage of services you might have, basing this on past years' expenses, and include the non-covered amounts as well in your cost comparison.

You must compare based on all three: Insurance cost, tax deduction, coverage. It sounds complicated but it won't be that bad. For the non-covered costs, you have past years to use as a guide for estimating. It need not be precise. The other two, tax deduction rates and premium costs, must be current year's numbers, however.

Answer 2

Unless you pay 50% taxes, your second option seems cheaper. The pre-tax cost of the difference would be ~$1200 per month. So the first option only worth it if from pre-tax $1200 you're left with after tax less than $600, which I doubt.

However, make sure to compare not only the costs, but also coverages. It might be that the second option is significantly cheaper, but also has significantly lower coverages

You can deduct post-tax medical expenses on your schedule A, but it is subject to a certain minimum (7.5% of AGI, as of 2011, it might be going up to 10% next year).