Pre-tax vs after tax deductions: what's best?

Paul in Cannon Beach

Recently our organization offered AFLAC and several employees signed up. We touted the benefits of pre-tax deductions in that you get more bang for your buck.

However, a vendor salesman from a different supplemental insurance company tells me that they go the after tax route because its better for employees. Why? He says that if deductions are made pre-tax, then you have to pay taxes on any pay out you recieve from supplemental insurance.

He goes on to state if the deductions are made after taxes, then any payout the EE gets would not be subject to taxes.

This is not my area really and our business manager is going to check this out but I am trying to be strategic (Margaret) and I know there are some awfully smart people (Don D) in this forum who might have some insight.

Thanks,

Paul

NaeNae55

I assume from your post that you are talking about disability insurance. If the employee pays for the premium with pre-tax dollars, any benefits paid are taxable. If the employee pays for the premium with after-tax dollars, the IRS considers the benefits have been taxed already so any benefits paid are not taxable income. Be careful though! Switching from one to the other can cause an IRS nightmare as the IRS can look at the TOTAL premiums paid for insurance and decide that a portion is taxable and a portion is not taxable.

In the long run it pays for the employee to have it pre-tax, as long as they NEVER need the benefits. Of course, if you could count on that you would not bother to buy the insurance. Our company therefore has an after-tax disability plan with premiums fully paid by employees. Most are quite happy with it.

Good luck!

Paul in Cannon Beach

Nae Nae,

Thanks! That matches up with what I have found. Disability income can be taxed if it was taken out pre-tax.

I appreciate the help!

Paul