Health Insurance Premiums on Maternity Leave

Today, I want to share an experience my wife and I recently had with health insurance premiums in the hopes that you guys will be more prepared than we were. Our experience was specifically related to my wife’s maternity leave, but the lesson can be applied to many situations.

When our son was born in March of 2012, my wife immediately went on maternity leave. She was able to take up to 10 months of unpaid leave, and while she wouldn’t receive any income, she had the choice to continue some of her other employee benefits.

Chief among these benefits was her health insurance. We had compared the insurance offered by her employer and that offered by mine and concluded that we had essentially the exact same coverage. Hers, however, came at a much lower cost. It was a no-brainer to use her employer’s insurance for as long as possible.

When you are an employee with employer-provided health insurance, your premium payments are typically taken directly out of your paycheck. These payments are made pre-tax. This means that your income for the year is reduced by the amount you pay for health insurance, which in turn reduces what you have to pay in taxes.

But while my wife was on maternity leave, she was not receiving any income. We therefore had to pay the premiums out of our bank account rather than having them deducted from a paycheck. My assumption, made without any research into the topic, was that these payments would be tax-deductible in the same way that payments made from a paycheck would be. Turns out I was wrong.

Because the payments were made with after-tax money, they were not tax-deductible. They are considered medical expenses and can be counted towards itemized deductions, which is a whole other topic, but my wife and I are taking the standard deduction so we’re getting no tax benefit from them.

For our specific situation, this doesn’t end up being a huge deal. We lose out on about $500 that we would have saved if the premium payments had been deductible, but it was still a much cheaper option than using my employer’s insurance. The main impact is that we simply end up with a smaller refund.

The main point here is to make you aware of the tax treatment. Most parents deal with maternity leave and may or may not stay on the mom’s insurance during that period. Furthermore, this same tax treatment will occur any time you pay independently rather than having the premiums deducted from a paycheck, whether it’s maternity leave or any other situation. Knowing ahead of time that any premium payments made from your bank account will not be tax-deductible can help you plan ahead.

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