The Extra Cost of Health Insurance Premiums on Maternity Leave

Health Insurance Premiums on Maternity Leave

Photo courtesy of Haylee Sherwood

We didn’t know that my wife’s unpaid maternity leave was going to increase our tax bill by $480.

It all has to do with health insurance premiums and a simple but important difference in how they’re paid. Hopefully our story helps you to be a little more prepared.

How it worked before the baby

Before she started maternity leave, Casey was an employee with the city of Boston. We were both on her health insurance, which worked just like it does in most companies. Her employer paid part of the premium, and the rest of it was taken right out of her paycheck.

Because the premium was taken out of her paycheck, and she therefore never actually had access to the money, the payment was tax-deductible (just like a 401(k) or Traditional IRA). So when it came time to do our taxes, her premium payments weren’t counted as taxable income.

With premiums of about $312 per month, that tax deduction was saving us about $81 per month between Federal, state and FICA taxes. Pretty sweet!

How it worked on unpaid maternity leave

Casey got a pretty generous amount of maternity leave, but it was unpaid. Still, she got to kept a lot of her employee benefits and health insurance was one of them. Since it was cheaper than the coverage my employer offered, we decided to stick with it.

The big difference? Now that she wasn’t getting a paycheck we had to pay the premiums ourselves. So every week we sent a check to her employer to cover the premium.

We didn’t really think much of it until tax time came and we got the W-2 from her employer. I noticed that the premium payments from her maternity leave hadn’t been deducted, so I called to see if we could get that fixed.

Well, it turned out that there wasn’t anything to fix. That’s just the way it works.

Health insurance premiums are only tax-deductible if they’re taken straight out of your paycheck. If you’re paying out of pocket, you’re out of luck.

Over the course of her 6-month maternity leave, we paid about $1880 in health insurance premiums. If those had been taken out of her paycheck, that would have saved us about $480 in taxes. But since we paid them out of pocket we wouldn’t see any savings.

Even without the tax savings it was still cheaper than going on my insurance, so it’s not like we had a better option. Still, it’s never fun to find out that you’re almost $500 poorer than you thought.

One more thing to watch out for

We were lucky that we didn’t have to deal with this other potential problem too, which could have been an even bigger deal. But it’s related to all of this and it’s definitely something to keep in mind for yourself.

Casey didn’t return to her job once her maternity leave was up, deciding to stay home with Aiden instead and work on building her counseling practice.

Well, it turns out that if you don’t return to work and you don’t have something like a major medical condition or other extenuating circumstance, your employer can require you to reimburse them for all the health insurance premiums they paid while you were on maternity leave. That would have been a HUGE and unexpected bill, and I feel pretty lucky that we didn’t have to deal with it.

What does all of this mean for you?

If you’re going on unpaid maternity leave and you’re planning to stay on your employer’s health insurance plan, just know that you’ll likely have a bigger tax bill as a result. The exact difference will depend on the amount of premiums you’ll be paying while on leave, as well as your various tax rates. It might be a good idea to put aside a little bit of savings to cover it.

The loss of tax benefits may also be something to consider if you’re trying to decide whether to stay on your plan or switch to your spouse’s. It’s possible that you might save money by switching to your spouse’s plan temporarily, even if it’s a higher premium payment. Just make sure you understand each company’s enrollment policies so that you can be sure you can switch back when you want to.

And if you’re not planning on going back to work once your maternity leave is up, or if you’re just not sure yet, you might want to ask your employer ahead of time what their policy is for that kind of situation. You can always frame it like you’re expecting to return to work, but you would just like to be prepared for anything. Best to know ahead of time if you might need to be reimbursing them for their share of the premiums.

Did you have any big, unexpected costs during your (or your spouse’s) maternity leave? Any lessons learned about how to be more prepared the next time?

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  • Retired by 40 July 17, 2014

    That’s a crazy amount of taxes for $1880 in premiums! Just adds insult to the injury of unpaid maternity leave! I didn’t have this problem with my kiddo, but I’ll definitely keep it in mind!

    • Matt Becker July 17, 2014

      I know, right! It’s basically because it’s all at the margin, so yeah it was a pretty big extra tax bill. Not a fun thing to find out after the fact.

  • Done by Forty July 17, 2014

    Whoa, thanks for this post. Thanks to this knowledge, when Mrs. Done by Forty has our first, she is going RIGHT back to work. 🙂

    • Matt Becker July 17, 2014

      Always good for a laugh DB40. I’m sure the Mrs. will be thrilled to hear this news.

  • Kipp July 17, 2014

    This is a very timely post for me as I have some impending health care decisions to make in my upcoming enrollment this September… it is definitely something that I need to take into consideration when deciding the costs of each insurance option.

    • Matt Becker July 18, 2014

      Glad you found it helpful! Good luck with your decision and let me know if you’d like any help.

  • Chris March 20, 2015

    This information was very helpful although not the information I wanted to hear. I’m going to be on unpaid leave once there is a donor for my lung disease. I need a bilateral lung transplant and could be out many months. I already knew I would have to pay my employer directly for health insurance premiums once my vacation days are exhausted while on disability. What I didn’t know is if I could still deduct the amount I pay in premiums while I’m out. It looks like the answer is “no”.

    This is incredibly stupid, but I expect nothing less from the IRS. I am already hit with tax bills every year because they punish my household for my wife having a part time job. Without her job, I would pretty much break even every year at tax time, but because of her job and that we are in different tax brackets, I end up paying $1000 every year when combining federal and state. She even does single with no allowances on her W4, and its still not enough to cover the difference. So couple this with the fact that when I’m paying health insurance premiums out of pocket, I’m really going to be screwed next year.

    So the message here is, if you are on maternity leave or recovering from a life threatening illness, rush back to work to avoid Uncle Sam taking even more of your money.

    • Matt Becker March 26, 2015

      I’m sorry to hear about your tough situation Chris. I agree with you that it seems like an arbitrary rule to let you deduct the premium payments when they come out of your paycheck but not when you pay them separately. It ends up hurting people for, in my opinion, no real reason.

      I wish you the best of luck with your transplant and I hope you find a way to manage the costs while you’re out. Please feel free to reach out any time if you need any assistance.

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