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How Can My Employees Pay for Medical Coverage on a Pretax Basis?


Q: I have a small business and can't afford to pay for my employees' medical coverage. I've heard there's a way that my employees can pay for their coverage on a pretax basis if I set up a special type of plan. How does this work?

A: An employer can set up a "premium-only" cafeteria plan that allows employees to choose to pay for their medical coverage by agreeing to salary reductions equal to the premiums. (If they don't want the coverage, they simply receive their full salary). The employees who agree to the salary reduction are not taxed on their salary reduction amount (nor on the receipt of the medical coverage). From the employer's perspective, there's no additional cost other than administrative fees (and many payroll companies are administering these plans for modest fees). The salary reduction amounts are not subject to FICA, nor are they reported as income on the employees' W-2 forms. This type of plan is a win-win situation for both employees and the employer.

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Last updated: Jan 31, 2000


Barbara Weltman is an attorney and a trusted professional advocate for small businesses and entrepreneurs. She is the author with such titles as J.K. Lasser?s Small Business Taxes and Smooth Failing, and she contributes regularly to American Express OPEN and Her articles have appeared in the Wall Street Journal and U.S. News and World Report. Weltman is also the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business at and hosts radio shows and podcasts, including Build Your Business radio. She has been named one of the 100 Small Business Influencers in the U.S. for the third year in a row.

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