What happens to an employee's paycheck under a preventive care plan?
The employee sees a new pre-tax deduction for the plan, which lowers their taxable wages and the taxes withheld. Depending on the plan design, they also see a plan benefit or reimbursement line. The combined effect on take-home pay varies by plan and by person, so ask for a sample pay stub from the administrator before rollout.
The lines that change on a pay stub
- Gross pay stays the same. Nobody's wage rate changes.
- A new pre-tax deduction appears for the plan contribution, made through a Section 125 cafeteria plan.
- Taxable wages go down by that deduction, so federal income tax, Social Security and Medicare withholding go down too.
- A plan benefit line may appear, depending on the program. How that line is taxed depends on what it pays for.
What it means for take-home pay
Many programs are designed so take-home pay stays close to what it was. Whether that holds for a given employee depends on their pay, filing status, state and the benefits they actually use. Avoid promising a specific result. Show employees an example and let payroll confirm the real numbers.
What employees get
Programs in this category typically add preventive care services such as around-the-clock virtual visits, health screenings and coaching. Confirm the exact service list with the administrator, and give it to employees in writing.
What employees should be told plainly
- Social Security. Lower FICA wages can slightly reduce a future Social Security benefit.
- Wage-based figures. Anything calculated from taxable wages, such as income shown on Form W-2, will reflect the pre-tax deduction.
- Participation is a choice. Employees should be able to ask questions and opt out.
- Their existing coverage stays. These programs are designed to sit next to the current health plan, not replace it.
Questions HR usually hears
Will my check be smaller? What do I have to do to use the benefits? Does this change my health insurance? Having written answers and a sample pay stub ready before the first enrollment meeting saves a lot of follow-up.
One thing employers should verify
Ask the administrator how any payment back to employees is taxed and why. The answer should be specific and in writing.
Common questions
Does an employee's gross pay change?
No. Gross pay stays the same. The change is a new pre-tax deduction and lower tax withholding, plus any plan benefit line.
Will take-home pay go down?
Many programs are designed to keep take-home pay about the same, but results vary by person and plan. Ask the administrator for a sample pay stub and confirm with payroll.
Can an employee opt out?
Employees should be given the choice. Confirm the enrollment and opt-out process with the plan administrator.
See if your company is a fit
Book a free 15-minute call with a founder. You get written numbers and the plan documents before you decide anything.
Book a free callThis article is general information, not tax, legal, accounting, insurance or benefits advice. Everlasting Benefits Group is an independent sales representative for third-party plan administrators and may be paid by them when an employer adopts a plan. We are not a plan administrator, insurer, law firm or accounting firm. Tax rules change and results vary by state, payroll and plan design. Talk with your own CPA or attorney before adopting any plan.