Whether you've just started a new job or you've been with the same company for years, you should ensure you're maximizing your employee benefits. Most employers offer a host of company-sponsored benefits. Often, the combined value of the coverage is worth a third or more of your base pay. That's too much money to leave on the table. And some employee benefits have valuable tax advantages you can't afford to ignore.
The most common way to receive health care insurance coverage is through your employer. While businesses with fewer than 50 employees are exempt from having to provide health insurance to their workers (though some small businesses do provide it anyway), companies with 50 workers or more are obligated to offer health insurance to their employees. When you're searching for a job, employer-provided benefits are important to consider before you accept a position.
Health Savings Accounts and Flexible Spending Accounts
Both Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are a way for those with health insurance to set aside money that is pre-taxed to pay for their health care costs, known as "qualified expenses," which include (but are not limited to) deductibles, copayments, coinsurance, monthly prescriptions and more. It can also be used for expenses incurred out of network. Both accounts let you save pre-tax dollars for future medical costs and can be used out of network. Some employers also contribute funds to these accounts. In most cases, you receive a debit card for your account and can use it to pay for qualifying expenses throughout the year. However, not everyone can qualify for opening an HSA. Only those who have high-deductible health plans can select an HSA. To qualify for a HSA, this High Deductible Health Plan (HDHP) must be your only health insurance plan, you must not be eligible for Medicare and you cannot be claimed as a dependent on someone else's tax return. HSAs aren't for everyone, and it's important to weigh the pros and cons before making a decision. A few factors to consider are if you anticipate needing expensive medical care in the next year or have a chronic medical condition.
Learn more about HSAs and FSAs.
FSAs and Pretax Contributions
There are two types of Flexible Spending Accounts (FSAs) – one for health care related expenses and the other for dependent care related expenses. The accounts are separate, and you may sign up for either or both during your Open Enrollment period. It's important to note that if you have a “family status change” during the year, you may qualify to enroll outside of this period. Each month, your contribution amounts are deducted from your paycheck, and you must actively re-enroll each year. Also note that FSAs are not transferable from one employer to another — you must enroll in your new employer's plan if you change companies.
The Internal Revenue Service (IRS) allows you to contribute to your FSA accounts through payroll deductions taken out on a pretax basis — meaning the money is deducted from your pay before federal and state income taxes and Social Security have been withheld. By contributing to an FSA to cover expenses you would have paid for anyway, you reduce your gross taxable income by that amount, in turn lowering your tax bill. The more you contribute to your FSA accounts, the greater your potential tax savings. Be aware that making pre-tax contributions to FSAs may slightly reduce your Social Security benefits at retirement. However, the value of current year tax savings usually offsets any such reduction in Social Security benefits.
Dependent Care FSA
A Dependent Care FSA lets you use pre-tax dollars to pay for qualified expenses related to care for your child, disabled spouse, elderly parent or other dependent. You must submit a claim every time you wish to request reimbursement of an expense. Regardless of the amount on your claim, you will be reimbursed only up to the amount in your account at that time. Unlike with Health Care FSAs, with Dependent Care FSAs you can be reimbursed only for expenses that fall within your current account balance, so you may have to wait until the account balance builds to sufficiently cover a large claim early in the year. The alternative to using a Dependent Care FSA is to take a dependent care tax credit when you file your federal income taxes. However, Dependent Care FSAs usually provide the greater tax advantage for most people, especially as income increases. If your company does not offer FSAs, consider talking to a financial adviser about other ways to save tax money on health and dependent care related expenses.