We talked last month about the benefits of flexible work schedules in reducing costs and improving employee morale, but is your business taking advantage of flexible spending accounts to reduce taxes for both you and your employees?
Flexible Spending Accounts (FSA) have been around for a long time–going way back to Cafeteria 125 plans whose major benefit focused on child care. Are you fully utilizing such a plan to reduce taxes during these tough times? Wyatt Hall with Allstate insurance says that FSAs are a hot topic for the businesses he deals with in his insurance and financial services business. The area of concern over healthcare costs and employee paid individual benefits has grown significantly over the last 10 years.
How does an FSA work? Employees are able to select from a menu of expenses they now pay for with after-tax money and set up a pre-tax payroll deduction account to pay these expenses. Some of the most popular items include child care, insurance premiums, insurance deductibles, and non-covered medical care such as exams, prescription drugs, medical supplies, vision care and glasses, hearing aids, dental care….the list goes on.
Because these are pre-tax deductions, neither the employer nor the employee has to pay social security or Medicare taxes (FICA) on the amounts deducted from their payroll. That's a savings of 7.65 percent for each, or $76.50 for each $1,000 in FSA deductions. In addition, the employee also avoids paying income taxes on the same amount.
Let's look at a typical female employee with children at home who pays a portion of her health insurance premium. Let's say she tops out at the $5,000 annual limit on child care. And that she pays $65.00 per month in health insurance premiums. She and the family average $50 per month for medicines, and they pay $350 per year for dental checkups and fillings. And, her husband wears glasses, so that means about $250 per year for exams and new glasses. So, that totals $6,980 per year that could be paid via an FSA account.
The employer will save $533.97 in FICA taxes for this employee. If there are only 10 similar employees in the company, that will mean $5,339 in savings to the employer.
The employee will not only be saving on the FICA taxes, but will also save on federal income taxes as well. So a couple in the 28% tax bracket will save $533.97 in FICA taxes and $1,954.40 in federal income taxes for a total savings of $2,488.37. Or look at it this way–without an FSA, the employee would have to allocate almost $9,500 of her salary to pay for these expenses after paying FICA and income taxes.
What a great win-win deal. The employer receives a tax savings and gives the employee a $2,400 increase (a no-cost raise) in spendable income! Now that's what I call a stimulus package.
The establishment of an FSA for your company and employees is no longer complicated or expensive. The only barrier between you and the potential savings is the reluctance to change that we all experience from time to time. But this change can put some big change in your pocket.
It's time to flex your muscles (money) and hold on to more of your hard-earned money so you can put it to work in your own personal stimulus package for your employees and your business. Bill Morris is a healthcare financial advisor and management consultant. Comments & questions may be sent to firstname.lastname@example.org