An austere economy is no reason for employers to skimp on all employee benefits. Why? Because a Section 125 Flexible Spending Account (FSA) plan saves employers and employees money on plenty of different health insurance premiums, healthcare and dependent care expenses.
Although they donít get a check from the government, FSAs pay out tax savings every pay period. Itís one of the fastest and easiest ways to deliver more benefits to employees without spending any money. Generally the tax savings to the employer far outweighs any administrative fees paid.
For every $1,000 of benefits employees deduct (pre-tax) from their payroll checks, the employer saves over $76 in FICA taxes. That could result in hundreds, if not thousands of dollars in savings. An average small employer with 10 employees redirecting $300 each month to an FSA can save over $2,700 in payroll taxes!
When premium costs increase, employers have the leverage to decide how much and when to increase the employee portion. And remember, the increase in premiums passed along to employees are paid with untaxed dollars. That means their take-home pay is not affected dollar for dollar with the premium increase.
Voluntary benefits are a breeze. Employees get the benefits they want, and employers donít pay extra. In fact, the more voluntary benefits employees purchase, the more the employer saves in FICA taxes.
Employees save on federal, social security, and state or local taxes (where applicable) on contributions to an FSA plan. That could add up to a 25% to 40% or more in savings on items they already buy.
Employees are happier because they have more money to spend and a no-hassle benefit. Especially paying premiums on a pre-tax basis. Sign up Ė and then forget about it. They know that they are paying less tax and keeping more of the money they earn. And letís face it, who wants to pay more taxes than they have to?
Individual Polices Increase Savings
Even if the employer is no longer offering health insurance, there are still ways for them and their employees to save. The IRS formally approved employer-paid individually-owned policy premiums. IRS Revenue Ruling 61-146 details how an employer may reimburse or pay for these type of premiums on a pre-tax basis.
What kind of premiums can everyone save taxes on?
Employers should notify the carrier of an individual health insurance plan and consult with their legal counsel. Also keep in mind that if disability coverage is paid on a pre-tax basis, any future benefits received will be taxable to the employee.
Eligible medical expenses are typically what we think of as normal medical charges. You know, the trips to the doctor, dentist, or optometrist. Medical care comes in three flavors Ė fees, prescriptions, and medical equipment.
Child and Elder Care Expenses
This benefit reimburses the participant for daycare expenses. The expenses must be incurred for an eligible child or adult and must allow the participant and their spouse, if they are married, to work or look for work.
This benefit will get more notice as baby boomers age and have responsibility for their parents. The older adult must be a dependent of the participant, be unable of self care and live with them at least eight hours per day.
A dependent care credit is available that can be included in a familyís tax return filing. Whether to participate in the daycare portion of a cafeteria plan or to take the tax credit depends on the individualís filing status, number of dependents and annual daycare expenses.