A pre-tax voluntary payroll deductions list illustrates the benefits to both employees and employers. Calculate the savings for both. Employers reduce FICA taxes paid, while employees gain similar savings, and reduce their IRS and state tax bill.
Find a list of allowable pre-tax voluntary payroll deductions. Learn how employers can expand choices for employees while reducing expenses at the same time! It just makes sense.
- Calculate the benefits of pre-tax voluntary payroll deductions
- Allowable pretax payroll deductions list
Allowable Pre-Tax Payroll Deductions List
Given that most employees stand to save significantly, they should take advantage of this IRS allowable pre-tax payroll deductions list. People often complain about having too much money coming out of their paycheck. It is a nonsensical argument. Using post-tax dollars from a bank account for the same expenses costs far more.
The most commonly allowable pre-tax payroll deductions list should include several health insurance policy types, childcare, life insurance, and unreimbursed medical expenses.
Pre-tax payroll deductions for health insurance save money. Since claims on traditional health insurance plans are paid directly to hospitals, doctors, and other providers, there is no consequence when you use the policy. The only downside is that you cannot cancel your policy at any time. Look at this simple example.
|Federal Levy – 25%||$250.00||$225.00|
|State Levy – 5%||$50.00||$45.00|
|FICA Levy – 7.65%||$76.50||$68.85|
Health Savings Accounts
There are two forms of pre-tax payroll deductions for Health Savings Accounts (HSA), the premiums and the savings component.
- HSA pre-tax premiums have no downside. The employee saves money on the premiums, and benefits are paid to providers.
- HSA programs have a savings component that you can fund with before-tax contributions. There are no consequences when the money is spent on qualified medical expenses. However, the employee may owe the IRS if the money is used for other purposes.
Supplemental Health Insurance
Pre-taxing supplemental health insurance makes sense in most instances except three: when claims payments may exceed out of pocket medical expenses, sometimes when ensuring income, or when paying for policies making lump sum payments.
Supplemental health insurance makes cash payments directly to the insured, rather than directly to hospitals and doctors as do traditional health plans.
Short-term disability benefit payments are reduced when the premium is paid pretax. The carrier will send a 1099 statement to the disabled person, the employer, and the IRS.
It is best to pay the premium after tax if you expect to use the contract. This is common for women who are planning a pregnancy. These women are planning to use the policy, and the claims payment may greatly exceed the accumulated premium. It makes sense to pay levies on the smaller income (the premium) than on the larger (the claim amount).
Lump Sum Policies
Supplemental health insurance policies that make lump sum payments, such as critical illness, are not eligible for pre-tax elections. Pay for these policies normally, and enjoy the full claims amount when you need it the most.
Dental insurance programs are the ideal candidate for pre-tax elections. Like every other insurance program, the company attempts to charge more in premiums than they pay out in benefits. On top of this factor, most plans impose annual benefit maximums.
Most policyholders lose on the deal, while a minority come out ahead. The pre-tax savings is the equalizer.
Pre-tax payroll deductions for childcare make great senses when employers offer a Dependent Care Flexible Spending Account (DCFSA). Most employees with a household income above $43,000 annually will find this option works better than taking the Child Care Tax Credit.
Families with one dependent in childcare do better the DCFSA. The DCFSA allows for a $5,000 contribution while the credit allows only $3,000. Families in higher income brackets see bigger savings with the DCFSA as marginal rates climb with income.
A $5,000 annual contribution saves employers $382 per participating employee.
Pre-tax payroll deductions for life insurance do not comply with IRS guidelines. These contracts already have tax-favored features. The death benefit is always paid in full to policyholder heirs without any IRS encumbrances.
Life insurance policies that accumulate cash value grow free of any levies.
Pre-tax payroll deductions for medical expenses also make great sense when employers offer a Healthcare Flexible Spending Account (HCFSA). An HCFSA offers two advantages compared to taking the deductions using Schedule A.
First dollar savings is the first HCFSA advantage. Savings begin immediately with no threshold to meet. Schedule A savings do not commence until unreimbursed medical expenses exceed 10% of Adjusted Gross Income.
FICA savings is the second HCFSA advantage. Schedule A reduces only income taxes.
Benefits of Pre-Tax Voluntary Payroll Deductions
Pre-tax payroll savings are one of the hidden benefits of offering voluntary employee benefit programs. Since the employees pay for the programs themselves, both employer and employees save money. Pre-tax deductions are not subject to FICA obligations for both parties.
The amount of money saved varies by employer size, the participation rate, and the income ranges for the employees. There are always tradeoffs that both employers and employees need to make. There are upfront savings, in exchange for later consequences.
A good agent will help you do the math.
Pre-tax Savings Calculator
A good voluntary employee benefits agent will provide a savings calculator that illustrates the savings for both employers and employees. The input variables differ for each.
When deciding whether to offer voluntary employee benefits, the pre-tax payroll deductions often contribute towards the decision to move ahead. Most agents will formulate a spreadsheet that calculates the projected savings to the employer.
The savings rates drop as employee income reaches the FICA Social Security Limit. In 2014, that limit was $117,000. The projection is based on several variables:
- Number of employees participating
- Average amount spent by participant
- Percentage of participants under the FICA limit
- Percentage of participants over the FICA limit
When employees sit down with a voluntary employee benefits counselor, the counselor’s enrollment systems will provide an employee-centric pre-tax payroll deductions calculator. The calculator illustrates the actual amount of money coming out of employees’ checks. The smaller the actual premium costs, the more they buy, and the longer they keep the policy.
The system will calculate the projected savings for each employee. At the employee level, the inputs are different. In addition to the FICA income limits, the system will include payroll, federal and state income tax savings.
Social Security Impact
Many people shy away from pre-tax payroll deductions because of the possible impact to Social Security benefits when they reach retirement age. These elections reduce the amount contributed into the Social Security system today, which in turn may reduce the number of benefits paid out at retirement age.
Determining whether certain saving today is better than an uncertain benefit loss years in the future is a very involved calculation, with many assumptions, and an uncertain conclusion. Most analysts conclude that the time value of money makes taking the savings today more valuable.