As we begin the new year, most HR departments will be rolling out a menu of benefit choices. What is the purpose of these benefits, and what is the advantage or value of each? Let’s explore the most common choices offered by employers and ways these may benefit you.
Many of these options will allow you to contribute pre-tax dollars to an account, which will reduce your tax liability when you file your return by lowering taxable income. To fully appreciate the value of pre-tax dollars, let’s assume you are in the 25 percent tax bracket for federal taxes. For every dollar contributed, you will save a combined 40 cents on federal, state, and payroll taxes.
Flexible Spending Account (FSA)
A flexible spending account allows an employee to contribute up to $2,500 (for 2013) in pre-tax dollars to an account which can be used for doctor co-pays, prescriptions, insurance deductibles and other qualified medical expenses. Over-the-counter medications are no longer eligible for this program unless prescribed by a doctor. One important characteristic of these plans is any amount remaining in the account at the end of the year is lost, and this account cannot be taken with you if you leave your current employer.
Dependent Care Flexible Spending
A dependent care flexible spending account is a type of flexible spending account wherein employees can contribute up to $5,000 annually on a pre-tax basis. These accounts are used to pay for childcare services for children under age 13. Dependent care dollars can also be used for adult dependents (as long as they are claimed as a dependent on your tax return). The caveat of these accounts is that if you are married, both parents must have earned income to qualify for this benefit. As with FSAs, unused amounts do not roll over to future years.
Health Savings Account (HSA)
A health savings account is owned by the employee and used in conjunction with a high deductible health insurance plan. The purpose of these accounts is to allow the employee to accumulate dollars to pay for qualified medical expenses that are not covered by insurance. The types of medical expenses that qualify are very similar to those that qualify under an FSA.
Both employer and employee can contribute to an HSA account. A maximum of $6,450 for a family can be contributed per year. If you are over the age of 55, you can contribute an additional $1,000 per year. Employer contributions are tax deductible to the employer and the employee contributions are made pre-tax. These accounts grow tax-free similar to a 401(k) plan and unused dollars are rolled forward to next year.
Similar to an individual retirement account, you can use contributions to an HSA as a tax planning tool to reduce your tax liability. If you have not already reached your maximum contributions for the year, you can make contributions up to the due date of your tax return to count towards last year’s contribution. The account is portable unlike FSA accounts, which means that if you change employers the money in the account stays with you.
Health Reimbursement Arrangement (HRA)
Health reimbursement arrangements are becoming a popular way for employers to limit their health care costs. In an HRA account, only the employer contributes money. A maximum contribution per employee is set each year by the employer. Unused amounts are never spent and are saved by the employer. This allows the employer to limit its health care costs. As the employee spends money on medical expenses, the employer will write them a reimbursement check on a tax-free basis.
Many employers offer group long-term and short-term disability policies to employees. In most of these programs the employee contributes money on an after-tax basis; however, if a claim is made and benefits are collected, these benefits are tax-free to the employee. A good rule of thumb is to purchase a policy that provides two-thirds coverage of your salary in the case of disability.
The benefit options available for both employers and employees are many and can be a confusing choice of letters and acronyms. The items described here are some of the more popular choices available. With health care costs continuing to rise, employers who want to continue to offer their employees this benefit have to become creative to keep their costs manageable.
If you have any questions about the tax implications of the benefit choices offered to you or any other tax concern, you should contact a CPA.
Content contributed by Potter & Company, a local certified public accounting firm offering core services of audit, business consulting, tax and financial analysis. Content written by Jeff Carlini, CPA, Manager. For more information, contact Potter & Company at 704-926-3300 or visit www.GoToPotter.com.