Determining which employee deductions qualify for pre-tax status can be tricky, but not for us. We’ll help with Social Security, Medicare, and both federal and state withholdings.
The key is to make sure the deductions that require an employer to have a plan document, actually have a plan document on file.
Insurance (health, life, dental, vision, disability)
Transit Pass & Parking
Employers may sponsor a plan for its employees to pay for group health premiums on a pre-tax basis [under Section 125 of the IRS Code]. A Premium Only Plan (POP) can save the employee on their payroll taxes thus increasing take-home pay. A written plan can be established by:
ConnectPay provides personalized plan documents and all the necessary material to communicate the written plan to employees. Each plan includes the required non-discrimination testing procedures to ensure compliance with federal regulations.
Premium Only Plans offer a simple way for employers to obtain favorable tax treatment for benefits already offered. Once set up, ConnectPay ensures your compliance by providing timely updates and modifications with little maintenance by the employer.
Flexible spending accounts (FSAs) provides pre-tax deduction for employees and reduced FUTA and FICA payroll taxes for the employer. FSAs give employees more disposable money per payroll for out-of-pocket expenses like doctor and dental expenses, day care, and medications.
Calculate Your Annual Tax Savings With A Cafeteria Plan
HSAs offer employees the opportunity to set money aside to pay high deductibles, as well as to save even more to pa other out-of-pocket medical expenses not covered by the health plan.
A recent study found that not even 1% of respondents maxed out allowable HSA contribution. That means they failed to capitalize on the many other advantages that HSAs offer. That could be because they confuse the rules governing HSAs with those governing flexible spending accounts-which have use-it-or-lose-it rules that don’t apply to HSAs.
In fact, if they’re made via payroll deduction, they’re pretax—which means you don’t have to sit around and wait for a refund.
Unlike an FSA, an HSA is not subject to use-it-or-lose-it rules—which means that the money you save inside an HSA can grow, literally, for years if you save more than you need for qualified health care expenses within a given year.
That’s right—the money you save inside an HSA isn’t subject to taxes as long as it’s in there. While many people just put the money away and don’t think about it till they need to take it out to pay some qualified health care expense, it’s just sitting there earning interest—on which the account holder does not need to pay taxes.
This can be a really big one. Lots of people aren’t even aware that if their balance is large enough, they can invest the money inside an HSA, rather than just save it. And since investment returns grow just as tax-free within an HSA as interest does, that means you could have a sizeable balance accumulating against possible future needs.
Say you’ve always wanted to get hair transplants or even join a health club, but somehow never got around to it because, let’s face it—those expenses aren’t exactly qualified medical expenses, and if you spend the money on them, you’ll be hit with a 20 percent penalty—plus pay taxes on the withdrawal. But once you turn 65, you can throw caution to the winds and go for it. You’ll still have to pay taxes, unless what you’re spending the money on is a bona fide qualified medical expense. Voilà… No more penalty.
While many seniors are trying to figure out how they might be able to cover the costs of long-term care, few have thought of using the money in an HSA to do it. But that’s an option, particularly if you have a family history that implies a future need for such care.
If you have a good balance in your HSA, that could be your key to a more comfortable retirement. If the money isn’t needed for qualified medical expenses, and you’re past the age of 65, remember that you can take it out, without penalty, and just pay the income tax. It ends up working in much the same way as a tax-deferred situation from a regular retirement account.
A health savings account annual contribution limit for an individual with self-only coverage is $3,350 and family coverage is $6,750
*rises by $50 for individuals in 2017
The annual minimum for high deductible health plans for self-only coverage
is $1,300 and for family coverage, $2,600
The annual high deductible health plan (HDHP) maximum out-of-pocket amount (for co-payments, not premiums) do not exceed $6,850 for self-only coverage or $13,700 for family coverage
The most common fringe benefit is Educational Assistance Programs provided by employers who wish to support advanced education and training and encourage employees to acquire new skills. All sizes of companies offer assistance programs.
This benefit covers graduate as well as undergraduate education but requires a formal written plan that defines who qualifies and meets other requirements of the IRS. This fringe benefit generally covers the cost of books, equipment, fees, supplies, and tuition up to $5,250 exclusion from taxable income for a course of study that is not work related but has a reasonable relationship to your business, or is required as part of a degree program.
Transit Pass Solutions Thrill Employees with Savings
Qualified transportation fringe benefits or “Commuter Tax Benefits” allow employers to save on payroll related taxes and employees to save on federal income taxes. ConnectPay codes and tracks the deduction in payroll as pre-tax, correctly track the limits and places it on the W-2 accordingly. Talk about win/win.
How everyone saves:
Employees save by not paying income tax on up to $125/month towards their transit commuting cost, thereby reducing taxable wages. Employees must participate through their employer; the only way to access pre-tax salary.
Employers save on the payroll taxes for each employee using transit to get to work. This benefit, open to every employer, is intended to be deducted and used each month. Keep in mind, since employers capture the payroll deducted tax upfront, the employee uses the deductions on a rolling basis and can’t be claimed on taxes at the end of the year because deductions are made throughout the year on a pre-tax basis.
Employers interested in providing this commuter tax benefit have options on how they administer the program based on federal pre-tax guidelines.
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