Continuing with the topic of open enrollment, this week we’ll discuss additional benefits that may be offered through your employer. Many employers will offer ancillary benefits, in addition to your traditional health insurance coverage, to help with retention and employee satisfaction. It’s important to take advantage of these benefits as they can save you money in taxes and premiums over time.
For example, it’s ordinarily cheaper for individuals to be insured through the group term coverage under their employer versus getting an individual life insurance policy through an insurance agent. The insurance company is able to keep premiums low as the costs are spread out amongst a group instead of just one individual. Oftentimes, employers will pay 100% of group term premiums, up to a certain amount of coverage, for eligible employees.
Although not every employer plan is the same, here are some additional benefits that employers more commonly offer:
HSA (Health Savings Account)
An HSA is a tax-advantaged plan used to accumulate dollars to help pay medical expenses. These plans are available to anybody under age 65 who is participating in a high deductible health plan. Although these accounts are not always offered through an employer, as long as you meet the age and deductible requirement, you’re eligible to contribute to an HSA. High deductible plans are considered having a minimum deductible of $1,400 with maximum out-of-pocket expenses of $6,900 for individuals and a minimum deductible of $2,800 with maximum out-of-pocket expenses of $13,800 for families as of 2020. Maximum contributions are $3,550 per year for individuals and $7,100 for families. There is a $1,000 additional “catch-up” contribution for individuals over age 55 as well.
Contributions made by an employer are not included in your income. If you as the employee makes a personal contribution, you can deduct this from your federal income taxes. On top of this, earnings within the HSA accumulate tax deferred. If withdrawals are made for “qualified medical expenses” they are tax free as well. This provides a great triple tax benefit to save for potential health expenses (tax deduction on the front end, tax deferred growth, and tax free distributions). If you take non-qualified distributions before age 65 you will need to pay ordinary income taxes as well as a 20% penalty on funds withdrawn. However, if you take non-qualified distributions after turning 65 you will still need to pay ordinary income taxes on withdrawals, but there will be no 20% penalty.
Cafeteria Plan
A cafeteria plan is a plan that offers you the choice of receiving cash or taxable benefits. This is similar to choosing among different items in a cafeteria at lunch, hence the name. These benefits can include medical coverage, disability insurance, life insurance, dependent care, and other options. With numerous options available, you are able to select what you want based on your specific needs. You can assign a specified amount of money to “purchase” the desired benefits before taxes, so your gross income is reduced, and therefore you pay less taxes overall. This type of plan provides great flexibility, but you must determine which benefits provide the most value to you.
FSA (Flexible Spending Account)
FSA’s are a type of cafeteria plan that allows you to pay for certain medical expenses tax-free. With an FSA, you estimate out-of-pocket medical expenses for the upcoming year and notify your employer. The employer then withholds this amount from your pay checks throughout the year, so no taxes are paid on the withholdings. You will pay for medical expenses out-of-pocket and the employer will reimburse you after taxes up to the amount you elected to withhold. This gives you tax savings on money used. The pre-tax limit for 2020 is $2,750.
Let’s look at some numbers to help explain this. Assume you expect to spend $1,200 on health care expenses next year. You would inform your employer and they would withhold $50 per check assuming you receive 24 checks per year (bi-monthly payments). When you go to the doctor and spend $100 that is not covered by insurance, you submit a claim and the employer adds $100 after taxes to your next check. So you were able to set aside this $100 and not ever get taxed on it. Your employer would do this up to $1,200 in this scenario. Be careful though, if you do not use the entire amount you set aside by the end of the year, you lose the money. This is why it is important to carefully analyze your healthcare needs before making an FSA decision.
Fringe Benefits
A fringe benefit is a form of compensation for performance of service that is in addition to normal salary. These benefits can be either taxable or non-taxable, depending on the nature. Each employer situation will differ on fringe benefits, but generally if a benefit is a small dollar value and not a frequent/regular occurrence, the benefit is non-taxable. This would include occasional coffee, personal use of the photocopier, birthday gifts with a low value, infrequent meals, etc. If the benefits are larger in value or more frequent, the benefits are considered taxable and the value is included in your gross income. With taxable benefits, you do not necessarily pay for the benefit itself, but you do pay taxes on it. Taxable benefits could include membership to a country club, regularly provided meals, certain transportation passes, etc.
As you can see, there are numerous benefits that can be made available outside of the “regular old health insurance” options. When working through the open enrollment process, it’s important to consider everything that is available to you. By planning and taking advantage of some of the lesser known benefits available, you can put some extra cash in your pocket and feel good that you are taking full advantage of the perks provided by your employer.
Ben Webster, CFP® and Derek Prusa, CFA, CFP®
Co-Founders and Owners of Aspire Wealth
Health Insurance Insights
