First time at the pre-tax benefits rodeo? Don’t worry- we’ve got you covered (pun intended). As a pre-tax administrator, we know how confusing the ins and outs can be. But we’re here to help you sort through the details.
One important clarification before we get started… Pre-tax benefits are not the same thing as insurance or health benefits. In most cases, your pre-tax benefits and health insurance can be complementary. But even if you have a pre-tax benefit plan, you’ll still want to sign up for benefits like vision, dental and medical.
And now… Here are three things you should understand if you’re new to pre-tax benefits.
1) Types of plans
Let’s start by defining a pre-tax benefit plan.
A pre-tax benefit plan is an account which you sign up for through your employer and fund through payroll deductions. The money is pulled from your paycheck before taxes. Hence, “pre-tax.” The funds in any pre-tax account can only be used for specific, designated items, known as “eligible expenses.” For most of the accounts, this means you can only use the money in the account to pay for medical expenses. In the case of a Commuter Benefit Account, funds can only be used for commuting. (We’ll expand on that shortly.)
There are four types of plans that fall under the auspices of pre-tax benefits.
There are several options with Commuter Benefit Accounts. You can have a Mass Transit Account, a Parking Account, or both a Mass Transit Account and a Parking Account. You must fund the accounts separately and you cannot cross-use funds. (In other words, you can’t realize you’re running low on Parking Account dollars and pull money from your Mass Transit Account.)
A Flexible Spending Account was the first plan to be introduced, back in 1978, as a “cafeteria plan.” The two most common types of FSAs are a Medical FSA and a Dependent Care FSA. A Medical FSA is used to pay for eligible medical expenses. Since 1978, there have emerged many varieties of Medical FSAs, from Post-Deductible FSAs to Limited Medical FSAs to Limited Post-Deductible FSAs.
Dependent Care FSA and Medical FSA
A Dependent Care FSA is another FSA account that is separate from a Medical FSA. It is intended to cover child care, day care or adult dependent care expenses. You can have either a Medical FSA or a Dependent Care FSA or both at the same time. Just remember that if you choose to have both, you have to enroll in them separately and fund them separately. Approximately 1 out of 3 people do not understand that separate elections must be made for Medical and Dependent Care. Be one of the two people that does understand.
Accessing FSA funds
The funds in an FSA are different from their pre-tax siblings in one main aspect: they can be accessed as soon as the plan starts. (In industry terms, “the first day of the plan year”). Individuals or families who need immediate access to their funds often prefer an FSA. An FSA is a great option if you have large, planned medical expenses that will take place in the near future or over the next year (e.g. surgery or medical treatments for a condition).
Health Savings Account are growing in popularity. They are the “youngest” of the pre-tax benefit accounts, having only been introduced 14 years ago in 2005. Health Savings Accounts have been steadily attracting more employees as users thanks to the triple tax benefit they present.
Triple tax benefit
First, you own the funds; they travel with you from job to job and even through unemployment. Second, you are automatically re-enrolled in an HSA and your funds rollover with you, from year to year. (Unlike with an FSA or HRA, where your employer owns and keeps any money you don’t use by the company’s deadline, known in jargon terms as the “end of the the plan year.”) Finally, the funds in an HSA can be invested or earn interest on a tax-free basis.
Another perk is that some companies may offer to “seed” or put money into your account, in addition to whatever amount you choose to have pulled from your paycheck. According to the 2016 Aon Health Care Survey, more than two-thirds (71%) of employers offer a health savings account (HSA) with employer seeding as part of the HDHP [High Deductible Health Plan.] Speaking of HDHP…
The one catch with HSAs is that you can only sign up for one if you have something known as an “HSA-compatible” health care plan. In other words, you are required to have a high deductible health care plan (abbreviated as HDHP.) A high deductible means that you have to pay more upfront, out of your own pocket, before your insurance kicks in. However, a higher deductible means you pay a smaller premium (the monthly amount that comes out of your paycheck to fund your insurance.)
Health Reimbursement Accounts are sometimes called “Plans by design” since they are designed by employers. Although the IRS defines the basic skeleton of an HRA, it is your employer who fleshes out the details. As a starting point for understanding HRAs, you can review our article “How do HRA Accounts Work? 5 Surprising Facts“. Since HRAs can take many shapes based on what your employer has set up, it is best to ask your employer for specifics and refer to your company’s plan documents for more information.
Now that you have a basic understanding of the four types of pre-tax benefit accounts, let’s go over IRS limits.
2) IRS limits for pre-tax benefits
Every year, the IRS releases updates to limits for each of the four plan types. “Limits” refers to the maximum dollar amount you can put into an account. You may also see limits referred to as “maximum contributions.”
Limits vary from plan to plan.
The maximum FSA limits are set by IRS but your employer may set a lower limit. If you choose to enroll in an FSA, you can confirm the limit your company is using (either the IRS one or a lower one) by checking your plan highlights. Your plan highlights can be found by logging into your account on BRiWeb.com. The current FSA limits as established by the IRS can be found here.
The limits for a Parking Account or Mass Transit Account are monthly, unlike the limits for other plans, which are annual. For 2018, the most amount of money you can put into your Parking Account or Mass Transit Account every month is $260. Any unused funds roll over from month to month.
In regard to HSAs, there is one limit for individuals (those with self-coverage) and another limit for families (those with family coverage.) For 2018, the individual contribution limit is $3,450; for families, the contribution limit is $6,900. You can review the HSA HDHP requirements here.
How Do I Know What the Limits Are?
Sometimes the limits go up from year to year, but that is not a guarantee. They can stay the same. If the limits increase, it is to account for inflation. Limits are announced at different times throughout the year. Generally, the limits for Commuter Benefit Accounts and Flexible Spending Accounts are announced in the fall. The limits for HSAs are announced in the spring. Remember, these limits do not take effect when they are announced. They take effect at the start of the upcoming plan year, in 2019. The HSA limits that will take effect in 2019 were just announced.
After determining which plan(s) is right for you, you’ll want to know when you can sign up for your plan(s).
3) Open enrollment
Depending on your employer, some or all of the four plan types could be offered. We can’t speak to your exact employment situation but we can give you a high-level timeline. (We’d advise seeing your HR department with questions about what plans are offered and when you can enroll).
Most companies offer open enrollment near the end of the year, around November. You usually have 45 days to review plan options offered by your company, and then enroll. When you enroll, you will choose how much you want to put aside into your pre-tax account(s) per paycheck. This amount is known as your “election”. The plans you enrolled in, including your election, will be in effect on the first day of the plan year.
The plan year
In most cases, the plan year begins on January 1 of the upcoming year. For example, if you start a job anytime in 2018, it is likely your company’s open enrollment will be in November 2018 and the enrollment selections you made will take effect on January 1, 2019. However, not all plan years start on January 1. For example, if you work for a school district, you may have a plan year that begins in the summer or fall. Consult with your employer to confirm.
4) Tax Savings
What if we told you that for every dollar you put aside into a CBP or FSA, you save 30 to 40 cents? Take your Commuter Benefit Plan as an example. Imagine your monthly commute was $125. If you didn’t have a pre-tax account, you would have to pay $125 for your commute, plus $37.50 in taxes. But with a pre-tax account, you don’t have to worry about the $37.50. That stays in your pocket. And $37.50 multiplied by twelve months of commuting? The savings add up pretty fast.
Tax Savings with a CBP
|Monthly commuter expense
|Monthly tax savings
(Federal, State, FICA)*
|Annual tax savings
The same is true of your FSA account. The current Medical FSA limit is $2,650 for an individual. (But remember, that’s for the whole year, not just a month.) If you assume 30% tax, multiplied by 2,650, you keep almost $800 in your bank by using a pre-tax account. That’s a decent chunk of change.
Now you’re ready for the first time you enroll in benefits. It may seem like there are a lot of options and details, and there are, but you can do it. If your company’s pre-tax benefits are administered through Benefit Resource you can call our Participant Services team at 1-800-473-9595 with any questions. We also advise checking with your HR department and reviewing your company’s plan documents. If all else fails, use this Buzzfeed article.
*The figures above are for illustration purposes only. Actual savings and tax rates may vary.