Is Supplemental Health Insurance Tax Deductible in 2025?

If you’ve ever glanced at your paystub and wondered whether the extra dollars you’re spending on supplemental medical insurance coverage could give you any tax relief, you’re not alone. This is one of the most frequently asked questions we hear at Section125Group, especially from business owners and HR professionals managing employee benefits.

Let’s cut through the clutter and give you clear, accurate information you can use. In this post, we’re going to unpack the tax implications of supplemental health insurance so you can understand what is—and isn’t—deductible, and how to optimize your benefits strategy.

Whether you’re self-employed, managing payroll for a small business, or simply someone trying to lower your tax burden without compromising healthcare, this blog is for you.

Understanding Supplemental Insurance: What It Covers

Before diving into deductibility, it’s important to clarify what we mean by supplemental insurance.

Supplemental health insurance doesn’t replace your primary health coverage. Instead, it’s an extra layer of protection. Think of it as your safety net—designed to help pay for out-of-pocket costs that your main policy doesn’t cover.

Common types of supplemental health plans include:

• Accident insurance
  
• Critical illness or cancer insurance
  
• Hospital indemnity plans
  
• Dental and vision plans
  
• Disability insurance
  
• Gap insurance
  
  

These plans offer targeted financial relief during specific health events, like hospital stays, accidents, or major diagnoses, that might otherwise disrupt your financial stability.

Now, let’s address the big question.

So, Is Supplemental Insurance Tax Deductible?

For Individuals: It Depends on How You Pay

If you’re an employee paying for supplemental health insurance out of your pocket (post-tax), you may be eligible to deduct those premiums as a medical expense—but there’s a catch.

Your total medical expenses must exceed 7.5% of your adjusted gross income (AGI) in 2025 to qualify for any deductions on your federal tax return. Only the amount above that threshold is deductible.

And here’s another layer: You need to itemise deductions. That means skipping the standard deduction and tracking all your medical costs, which isn’t practical for everyone.

📝 Key Point: If your employer deducts premiums from your paycheck pre-tax, you can’t claim them again on your return—they’ve already given you a tax advantage.

For the Self-Employed: A Tax Planning Opportunity

If you’re self-employed and not eligible for an employer-sponsored plan, things look a little brighter.

You may be able to deduct 100% of your supplemental health insurance premiums as an “above-the-line” deduction. That means you don’t need to itemise—a big win.

This deduction applies as long as:

• You show net income from your business
  
• You weren’t eligible for coverage through an employer (including your spouse’s plan)

Just keep your records clean. IRS scrutiny tends to be higher for self-employed deductions, so documentation is key.

Employer-Sponsored Supplemental Plans: Where Section125Group Comes In

For businesses offering group supplemental benefits, the tax story gets more strategic—and this is where Section125Group helps unlock real value.

With a Section 125 Cafeteria Plan, employers can allow employees to pay for supplemental medical insurance coverage using pre-tax dollars.

This benefits everyone:

• Employees reduce taxable income, boosting their take-home pay
  
• Employers have lower payroll tax liability, including FICA and FUTA contributions.
  

Example Scenario

Let’s say an employee earns $50,000 and elects $1,200 annually in supplemental premiums through a Section 125 plan.

• The employee’s taxable income drops to $48,800
  
• The employer pays less in payroll taxes.
  
• The employee saves roughly $300–$400/year in taxes, depending on their tax bracket.
  
  

Multiply that across your workforce, and the tax benefits of supplemental insurance become crystal clear.

Why Pre-Tax vs Post-Tax Matters So Much

This distinction is crucial.

If premiums are paid pre-tax (through a Section 125 plan):

• You save on taxes today
  
• You can’t deduct the premiums later, because the benefit has already occurred.
  
  

If premiums are paid post-tax:

• You may qualify for a deduction, depending on how high your medical expenses are and if you itemise

So, it’s not about one option being “better” than the other. It’s about what works for your current income, employment status, and whether you’re running a business.

Pro Tip from Section125Group: Want flexibility? Offer both pre-tax and post-tax options to your employees, and educate them on how each impacts their wallet.

How Supplemental Insurance Impacts Your Tax Strategy

Supplemental insurance isn’t just about medical protection—it’s a tool for smarter tax planning.

For Employers

Employers who integrate supplemental coverage into a Section 125 plan:

• Save on payroll taxes
  
• Improve benefit offerings without increasing costs.
  
• Boost employee retention with meaningful perks.
  

For Employees

Employees enjoy:

• Lower out-of-pocket costs during health events
  
• Tax-advantaged premiums (when enrolled in a Cafeteria Plan)
  
• Peace of mind that standard health insurance just can’t provide on its own
  
  

The key is educating your team on how these policies work—and how they’re taxed. When people understand the benefits, participation increases. And that drives savings for both sides.

Additional Tax Benefits of Supplemental Insurance

Supplemental coverage can feel optional, especially if budgets are tight. But here’s the thing:

When used strategically, it offers layers of tax savings beyond just premium deductions.

Reimbursements Are Usually Tax-Free

If you receive payouts from your supplemental policy, like a lump sum for a critical illness, those funds are typically not taxable.

Why? Because they’re considered insurance reimbursements, not income. You can use that money for anything: mortgage, groceries, or out-of-network treatments. And the IRS doesn’t touch it.

HSA Compatibility

Some supplemental plans can complement HSA-qualified high-deductible health plans (HDHPs).

• You get to max out your HSA contributions, which are tax-deductible.
  
• Meanwhile, your supplemental plan cushions big expenses that your HDHP won’t cover
  
  

This combo works especially well for people managing chronic conditions or high-risk lifestyles.

What the IRS Looks For: Avoid These Common Pitfalls

Let’s be honest—no one wants a surprise letter from the IRS. If you plan to claim a deduction on your supplemental insurance premiums, it’s important to understand where things can go sideways.

Misclassifying Premiums as Deductible

The most common mistake? Trying to deduct pre-tax premiums again on your tax return. If your premiums were paid through a Section 125 plan (and they usually are, if you’re an employee), those dollars have already lowered your taxable income. You can’t double-dip.

Tip from Section125Group: Always review your paystub or talk to your HR manager to confirm whether premiums were deducted pre- or post-tax.

Failing to Meet the 7.5% AGI Threshold

Another issue: counting all your medical expenses, only to realise they don’t exceed 7.5% of your Adjusted Gross Income. If you don’t clear that threshold, none of those expenses, including your supplemental insurance, will be deductible on Schedule A.

And unless you’re facing a high volume of unreimbursed medical bills, you might be better off taking the standard deduction anyway.

Missing Documentation

Whether you’re self-employed or filing itemised deductions, always keep:

• Premium invoices or receipts
  
• Bank or credit card statements showing payments
  
• Copies of policies with coverage details
  
  

It’s not about being paranoid—it’s about being prepared. If you’re ever audited, you’ll be glad you kept records.