Q. I’ve just accepted a job at a small company that has offered me this choice: take the company health plan or don’t take it and get an extra $12,000 a year in pay. Is this legal, and if it is, what should I choose?
A. “It’s called an opt-out incentive,” says Ben Cohen, senior benefits adviser with Kushner & Company, an employee benefits consulting firm based in Kalamazoo, Mich., and it’s legit as long as a few conditions are met:
- The company plan is a so-called “Section 125” plan in which both employer and employee premium contributions are made with pre-tax money, and the opt-out incentive is explicitly written into the plan.
- All employees eligible for the company plan are offered the same opt-out deal. (This is to prevent the company from only offering it to sicker employees as a way to save money.)
- The extra money is paid as ordinary taxable income.
Whether or not you should take this deal depends on your personal tax situation and what kind of insurance you can get on your own.
Let’s start with taxes. If you are in the 25 percent tax bracket, you’ll be paying an extra $3,000 in income taxes on that $12,000. You’ll also be paying an extra $918 in payroll taxes. That leaves you $8,000 to play with. You’ll also need to credit yourself with whatever your contribution to the company plan would have been. For instance, a $200-a-month contribution adds up to $2,400 a year that you won’t be spending on the company plan.
Next, investigate what’s available on your state’s Health Insurance Marketplace. Bear in mind that even if you don’t take your employer’s health insurance, just the fact that it’s offered disqualifies you from getting tax credits to lower the cost of your premium, regardless of whether your income would otherwise qualify you for this benefit.
For an apples-to-apples comparison, you’ll need to figure out which marketplace plans have deductibles, co-pays and co-insurance comparable to your workplace plan. If the annual premium is less than $8,000 plus whatever you would have contributed to the company plan, you’ll come out ahead by taking the deal.
Now, if you are young and exceptionally healthy, you might consider rolling the dice by getting a cheap high-deductible Bronze plan from the marketplace on the assumption that you won’t use it except for preventive care (which is free no matter which plan you choose) and an occasional doctor visit. In that case, though, you need to be prepared for some hefty out-of-pocket costs if you end up with an expensive-to-treat illness or injury.
— Nancy Metcalf
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