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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!

  • See my answer to your other question for some discussion of related issues. I am going to flag the two questions and ask the moderators to merge them. – Dilip Sarwate May 2 '12 at 17:00
  • As I see it, they are two different questions. This question is: Is there an easy way to calculate the net difference between these two approaches so I can make a smart decision? Meanwhile, the other one asks: My questions is whether or not I can use the cost of the premiums for my wife and kids ($600/month) as an out of pocket medical expense or some other deduction. – George Marian May 2 '12 at 17:08
  • 1
    @GeorgeMarian The net difference, if it is measured purely in money, does need to take into account the taxability or deductability of the various amounts. There are also issues of coverage and renewability etc that need to be taken into account if the net difference means the whole package deal: is A a better deal than B? I don't think the two can be discussed separately, but since you are a moderator, I will bow to your decision that the two are different questions. However, I won't bother responding to this one separately. – Dilip Sarwate May 3 '12 at 20:52
3

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.

  • If anyone indeed goes about making a spreadsheet: PLEASE post a link here as well. That spreadsheet can be reused for sure (you can also email me and I can host it for public access too) – f1StudentInUS May 6 '12 at 17:47
1

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).

  • Definitely--private coverage is usually inferior to employer coverage. – Loren Pechtel May 6 '12 at 15:01

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