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 ‭(Hidden)‬ Catalog-Item Reuse

How Employee Benefits Offer a Tax-Efficient Way to Meet Employee Needs

Independent agents should consider engaging their clients in a conversation about their human capital needs and how well-crafted employee benefits plans can address those needs in an affordable way.
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how employee benefits offer a tax-efficient way to meet employee needs

As we approach the time of year that we all hatetax filing timewe should think of it as an opportunity to review our finances and look for opportunities to save on income taxes while meeting our personal finance objectives. For most taxpayers, many of the deductions that they used to take advantage of are no longer available because they no longer itemize. Yet, the one avenue that continues to provide an opportunity for workers is through their employer's employee benefits program.

Starting with medical insurance and the alphabet soup of tax-preference savings accounts—FSAs, HSAs, HRAs, QSEHRAs and ICHRAs—these represent tax-advantaged vehicles to pay for out-of-pocket medical expenses as defined in Section 213(d) of the tax code. The potential list of expenses is broad, including dental, vision and physician-prescribed medical devices and supplies.

Most importantly, amounts contributed to these types of accounts escape federal, state and Federal Insurance Contributions Act (FICA) taxation. Last year, the IRS announced that for 2022 tax filings, the FICA wage base is $147,000. For most taxpayers who take advantage of a health savings account (HSA), it could translate to a subsidy of 30% or more of the cost.

Of course, there are rules and limits to what can be contributed—but it is important to keep in mind that when funds are added and reimbursed through these accounts, they are not subject to tax. Therefore, it pays to do some budgeting and forecasting of your typical health expenditures for the coming year during your annual enrollment period.

For the employer, sponsoring these accounts can be a win-win because Uncle Sam helps subsidize these expenses through tax savings. These accounts are set up through payroll deduction and there are administrative fees involved in the recordkeeping. However, FICA payroll savings to the employer can more than offset the costs involved.

The tax code allows employers to provide $50,000 of term life insurance tax-free to their employees. The cost to the employer is minimal. Often, employees are given the opportunity to purchase additional amounts on a contributory basis.

Sometimes it also makes sense to pay for an employee benefit upfront so that if the benefit is paid out the payments are not subject to income tax. This is the case for long-term disability insurance, which is a valuable benefit for people of all ages. And it is much less expensive when provided through an employer than when purchased individually.

One of the foundational employee benefits is retirement. Offering a retirement savings plan like a 401(k) plan or Savings Incentive Match Plan for Employees individual retirement account (SIMPLE IRA) is essential in recruiting and retaining valuable employees. Studies indicate that after medical insurance, retirement plans are the second most valued employee benefit.

Over the years, Congress has simplified the rules for retirement plans so that em­­p­loyers of all sizes can take advantage of them. Most retirement plans now provide an employer contribution—or matching contribution—which is made on behalf of an eligible employee on a before-tax basis. This means the employee is not taxed on it until the contribution is withdrawn, presumably at retirement. 

Also, many 401(k) plans allow for Roth IRA contributions, which are made on an after-tax basis and permit employees to tailor their approach. Instead of the old way of paper plan administration, technology enables online enrollment and digital statements, which greatly lessen the administrative hassle.

Independent agents should consider engaging their clients in a conversation about their human capital needs and how well-crafted employee benefits plans can address those needs in an affordable way. Further, given the competition for talent in the insurance industry, they should consider their own agency's benefits program.

Dave Evans (dave@401ksleuth.com, dave@aartrijk.com) is a senior associate with insurance marketing firm Aartrijk, based in Fairfax, Virginia.