What are pre-tax benefits, and how can your nonprofit employees use them for a more profitable, less taxing life? Pretty simple questions, right? Not exactly.
While nonprofit organizations have been offering tax-advantaged benefit programs to their employees for years, many people do not fully understand what they entail or how to use these powerful financial tools to their advantage.
Pre-tax benefits are accounts that you can enroll in via your employer and fund through payroll deductions. The funds are subtracted from your paycheck before taxes. Taxes are then calculated on the reduced salary amount. Pre-tax deductions shrink your taxable wages, meaning you may owe less federal income tax and FICA taxes (Medicare and Social Security taxes).
Typical pre-tax deductions include things such as health insurance premiums and contributions to health savings accounts. Three common types of health-related savings plans are healthĀ savings accounts (HSAs), flexible spending accounts (FSAs) and healthĀ reimbursement arrangements (HRAs).
Many Americans are currently benefiting from consumer-directed health accounts, including HSAs, FSAs and HRAs — thatās the good news. The bad news is many others may be missing out because of a lack of understanding when it comes to these three options.
According to Aflacās 2018 Workforces Report, the impact of an enticing benefits package can be quickly negated if employees cannot comprehend the plans being offered. Consider these findings:
ā¢ 30% of employees surveyed said they need more information when it comes to their benefits.
ā¢ 19% said they didn’t feel confident they understood everything they signed up for after their recent benefits enrollment.
ā¢ 21% said “simpler language” would help them better understand what is and isn’t covered. In fact, it was cited by employees as the No. 1 way to improve the enrollment process.
The Alphabet Soup Of HSAs, FSAs And HRAs
Before I explain how pre-tax health benefits can help your employees throughout their lives, letās review the āABCsā of HSAs, FSAs and HRAs.
HSAs, or health savings accounts, are designed to help individuals who are covered under high-deductible plans save for medical expenses.Ā Funds contributed to an HSA from any source belong to the employee and can never be forfeited, or turned back to the employer. HSAs allows employees to make decisions about spending dollars in the account on qualified medical expensesĀ or preserving the balance, which grows tax-free, to pay for future expenses.Ā As of last year, the total number of HSAs was atĀ nearly 26 million.
FSAs are health savings accounts that give employees certain tax advantages, allowing them to contribute portions of their regular earnings to pay for anticipated health care expenses.Ā Employers have the option to also make contributions to health FSAs, not to exceed the annual limit. Like employee contributions, any contributions made to the plan by employers are not taxable to employees. Common uses of FSA dollars include paying for out-of-pocket costs such as deductibles, co-pays, dental, vision and prescription drugs.Ā An estimated 30 million Americans rely on FSAs to get theĀ healthcare services they need.
Lastly, HRAs are self-insured arrangements that are established and completely funded by employers. They help reduce insurance premiums and provide employees with greater control over their health care expenses.Ā Reimbursements to employees are not taxable. An HRA offers great flexibility and can be combined with any type of health plan. Depending on plan design, employees can also carry over unused funds into the following plan year. More than 14 million Americans have HRAs.
A Lifetime Of Benefits
Tax-advantaged health care plans can provide a lifetime of coverage for your nonprofit employees while helping them strengthen their financial futures. Here is a look at how your employees can benefit at every life stage:
The Roaring Twenties
This can be a great time to begin taking advantage of an HSA. Assuming your employees are in reasonably good health, their healthcare costs are typically lower, meaning they will probably need less medical care. Once an HSA is established, the account doesnāt go away. It also serves as an additional savings vehicle with a triple tax advantage: pre-tax contributions, tax-free interest and investment earnings, and tax-free payments for qualified medical expenses.
Many significant life events typically unfold when you enter your thirties, such as starting a family and purchasing a house. Often times, this is a period when there is a balance of spending and savings, but employees are probably on a tighter budget, with more medical expenses. Even though employees have to use the money within the plan year, an FSA may be advantageous because employers take money out pre-tax, with those dollars ($2,700 in 2019) available on Day 1, unlike an HSA.
Forties And Family
As employees enter their forties, they are presumably more established in their professions and may have families. Their incomes are likely higher, and important savings and investment decisions need to be made. Retirement is now in the near future. Their children are nearing college age, and more health cost issues may be popping up. To boost retirement savings, HSAs could benefit these employees, along with FSAs if they are incurring more health costs.
Because these employees are heading into their prime earning years and also thinking about retirement, HSAs would be advantageous. If an employee is 55 or older, federal regulations allow ācatch-upā contributions, letting them make an annual contribution up to $1,000 per year. With HSAs, employees can make tax-free deposits into their accounts every year, lowering their tax bills.
Retired And Loving It
Once an employee enrolls in Medicare, they are no longer eligible for an HSA. But by accumulating assets throughout their lifetime with an HSA, they will be able to deploy the funds for nursing home care and other health-related costs.
Life, with its inevitable bumps, surprises and setbacks, can be challenging. Helping your employees better understand pre-tax benefits can make it less so over the long haul.