The Beauty of the Health Insurance Buyout

Some employers offer cash to employees in lieu of certain benefits.  One common example of this is if an employee opts out of the employer’s health insurance plan, they will receive a percentage of what the employer would have paid towards the premium.  This is called a buyout.  Each workplace is different, so it is important to read the fine print on your HR paperwork to see if this is an option, and if it pays to take advantage of it.

Why would you opt out?

For most people, you wouldn’t opt out of the health insurance plan your employer provides because that is an additional benefit that you receive. Generally speaking, your employer pays a percentage of the premium, and you have a percentage taken out of your paycheck.  The health insurance offered through your employer is usually more affordable to you than comparable coverage you could buy for yourself through the marketplace.

However, if you and your spouse are both working, there is a chance that one of your employers offers a buyout option for health insurance.  You could both receive health insurance from one of the employers, and the buyout amount from the other.

Crunch the Numbers

If the buyout amount is small or there is no buyout option, then it might make more sense for a married couple to stay on separate individual plans. Without the buyout at my school, my Empire Blue Cross Blue Shield plan costs me $312.65 per month for a family or $140.20 for an individual. The employees pay 15% of the monthly rate, and the school pays 85%.   My husband’s school district offers the same health insurance options at a nearly identical price.  For the two of us, without the buyout, it would be cheaper to each pay for the individual plan from each of our schools.

Both of our schools offer a health insurance buyout, if you prove that you are covered under a spouse’s plan.  I was hired first by my school, so we signed up for the family plan from my school.  Then, when my husband was hired, we took the buyout from his school without thinking twice.

This was a big mistake.

After living under the assumption that because our monthly rate for insurance was the same at both schools, that the buyout would be the same, we realized that we were missing out on THOUSANDS of dollars.

The buyout that we were receiving from my husband’s school was $1,200 a year (before taxes).  I was shocked when I realized the buyout from my school was $7,441.20 (before taxes).  My school pays $6,241.20 more (before taxes) than my husbands’, if you opt out of THE SAME INSURANCE!

After realizing our mistake that first year, we switched to my husband’s insurance (same plan, just through his school), and are now happily receiving the buyout amount from my school.  My school splits the buyout amount between a paycheck in September and another in April, so it really feels like a bonus when we receive those checks.

Why do some employers offer this option?

It may seem strange that our jobs pay us for choosing not to take a benefit, but it really makes a lot of financial sense (and cents!).

Let’s take a look at my school for an example.  If I choose to sign up for my insurance, it will cost my school $1,771.70 per month or $21,260.40 per year for my family plan.  If I don’t take the insurance, they will pay me $7,441.20 or 35% of what they would have contributed for active family coverage under Empire.

The district saves $13,819.20 each year that I opt out of their insurance.

Why is the buyout amount different between the two districts?

Mr. Farmhouse Finance’s school offers the same insurance options, but their buyout amount is much less.  There could be a number of reasons for this. One possibility is that our union was able to negotiate a higher amount.  Other reasons could have to do with budget concerns or the fact that my district is larger and may be able to offer additional benefits to employees.

Things to Look Into

If you and your spouse are both working, you should look into the possibility of receiving a health insurance buyout from one of your employers.  Don’t make the same mistake that we did by assuming that the amount would be the same both ways.  Really crunch the numbers to determine the following:

  • Is it cheaper for a working couple to be on individual health insurance plans?
  • Do one or both employers offer a buyout option?
  • Is the buyout amount large enough to make sense to be on one family plan and receive the buyout from the other employer?
  • If both employers offer a buyout option, which one pays more (when factoring in the cost of the premium and the quality of insurance you will receive from the other job)?

If your contract gets renegotiated every few years (like ours do), pay attention to how your benefits will change.

Does your employer offer an option to opt out of health insurance coverage?

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