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Pre-Tax Planning

Pre-tax plan benefits come in a variety of forms and are available through specific sections of the IRS Code. Some have been available for quite some time, while others are relatively new to the marketplace. Nevertheless, they are bona fide employee benefit plans that operate separate and distinct from other insurance plans. Outlined below are the most popular types of pre-tax plans that can be used strategically to compliment an overall benefit program. Savings available by incorporating pre-tax benefits into a benefit program can be significant for both the employer as well for employees. Reilly Benefits will show you how certain plans can benefit your organization.

Premium Only Plan

POPs are perhaps the simplest form of pre-tax benefit available through the IRS code. By installing a POP, the employer allows employees to “convert” the payroll deductions they pay for health, dental, vision, and sometimes other benefits, to a pre-tax basis, thus allowing the employee to save the Federal, State, FICA, and Medicare taxes they would otherwise pay when the benefits are paid for with after tax dollars. Because the employer matches the FICA and Medicare taxes (currently 7.65% of payroll), the employer also realize savings. POPs are easy and inexpensive to implement and most employers should have one.

AgriPlan or BizPlan

Agriplans or Bizplans are generally established by small sole proprietor-owned businesses. The plan allows a sole proprietor, who would not otherwise be eligible to receive company-paid premiums without having to pay taxes on those premiums, to establish his or her spouse as an employee of the company and to set the insurance plan on that spouse as the primary beneficiary. By “hiring” the spouse as an employee of the company, the company is then able to pay the spouse’s insurance premiums as business expense. The owner of the company can then take coverage as a dependent on the spouse’s plan, and the owner is able to receive company-paid premiums on a non-taxable basis.

Flexible Spending Accounts (FSAs)

FSA benefits allow employees to set aside dollars on a pre-tax payroll deduction basis to pay for expenses they expect to incur within the exiting plan year. For example, an employee who wishes to have laser eye surgery during the coming year can elect to contribute $1500 dollars to a healthcare FSA through regular payroll deduction over the course of the year. When the procedure is done, the employee can submit the receipt for the treatment and receive a reimbursement for the $1500 bill. The net result is that the laser surgery is paid for with pre-tax dollars, so the employee saves the Federal, State, FICA, and Medicare taxes on the $1500 expense. The employer also saves the matching FICA amount. There are a number of eligible FSA “accounts” that an employer can offer, as explained below.

Healthcare

Just about any health, dental or vision expense can be paid for through a healthcare FSA, as long as the expense is medically necessary and not considered cosmetic in nature. Section 213(d) of the IRC code outlines eligible medial expenses.

Dependent Care

Charges paid for licensed day care are eligible to be paid pre-tax through a Dependent Care FSA, as long as the child is under the age of 13, the daycare facility is a licensed facility (no grandparents!), and as long as the reason the parent has the expense is to enable the parent to work. Up to $5000 per year may be paid for daycare through a dependent care FSA, which can add up to significant tax savings. Once again, the employer saves the FICA and Medicare match associated with dollars that employees pay through the account.

Adoption

Expenses related to the adoption of a child may be paid for with pre-tax dollars through an Adoption FSA account. Charges include evaluation fees, administration fees, and facility fees, as they may apply.

Individual Premium Reimbursement

Many employees have coverage through the individual market, through Medicare, Tri-Care, or previous employer retiree programs. Often, the employee may have the employer sponsored plan while the spouse has coverage through one of these other plans. The individual premium account allows an employee to pay for his or his spouse’s other coverage with pre-tax dollars as long as the other coverage is a non-employer-sponsored, is considered an individual plan, and is directly billed to the member or the member’s spouse. Eligible individual plans include TriCare and Medicare supplemental plans in addition to the costs for the actual Tri-Care or Medicare benefit.

Parking and Transit

Where employees have parking (city garage for example) or transit (public transportation) expenses, a Parking and Transit account can help offset those costs by allowing the employee to pay those expenses with pre-tax dollars up to certain limits. As with the other FSA accounts, all dollars paid through these accounts lower the employer FICA and Medicare match.

Health Reimbursement Arrangements (HRAs)

Employers establish HRAs to reimburse the employee, or to pay directly for specific medical expenses, the member may incur. HRAs are “promises to pay” certain dollars toward employee medical expenses. The employer will often find that requiring a deductible for a health plan lowers the premium enough to rationalize reimbursing employees a portion of, or all of the deductible amount in the event the employee incurs the expenses. If the employee does not meet the deductible, then the dollars that would otherwise go directly to the insurance company for a plan with no deductible are not spent, thus the employer can realize significant savings with the approach. HRAs can be designed in a number of ways, with the employer paying the entire deductible or just a portion of the deductible. They can be established for other expenses unrelated to a deductible too. For example, an employer may elect to direct dollars to employees for dental care, vision care, or specific copays. Dollars are usually established as “use them or lose them” with no accumulation from year to year, but some employers opt to allow specific dollar amounts to roll over into subsequent years. HRAs can be a great tool in the design of a healthcare plan, but they do have some drawbacks. They require claims administration and reimbursement values, or “promises to pay,” are subject to COBRA continuation.

Health Savings Accounts (HSAs)

HSAs are relatively new to the benefits world. They were authorized by the Medicare Improvement and Modernization Act of 2003 and have exploded in popularity over the last few years. HSAs are employee-owned savings accounts that can be funded either by the employer or by the employee, up to specified annual Federal contributions limits. The HSA concept works on the theory that the employee enrolls in a high deductible health plan, which reduces the cost of the insurance plan, oftentimes as much as 30-40%, and the resulting savings can then be directed to a pre-tax savings account that can then be used to pay the deductible if the employee has to meet the deductible. Unlike the HRA approach, the HSA allows the employee to save and grow their dollars in the account for those years where the deductible is not reached. The account operates similar to an Individual retirement Account (IRA) in that the dollars invested are tax-free and the interest earned is also tax free.

Like the healthcare flexible spending accounts, just about any medical expense, subject to the IRS Section 213(d) listing, is eligible to be paid for out of the account on a pre-tax basis. This means that expenses like dental, vision, even over the counter medicines, may be paid for out of an HSA. The approach provides significant savings for those who have very low or even very high medical expenses. The main goal of an HSA plan, besides reducing cost, is to encourage employees to become more responsible for their own healthcare savings and expenditures. A member who starts to save now can grow their accounts in measurable fashion over the course of even just a few years. If a member doesn’t have a lot of medical expenses today, he’s sure to have expenses later in life, so giving an employee the vehicle to save today is most important. HSAs have significant tax benefits and can be shown to offer the one of the best cost/benefits available in the healthcare marketplace today.

Testimonials

'The commitment Reilly Benefits makes to our company to ensure our benefits and claims are handled promptly and correctly goes beyond that of any agency I have seen in my 20 years of working with insurance brokers.'

Karen Siebert, CFO
Great Mills Trading Post
'The commitment Reilly Benefits makes to our company to ensure our benefits and claims are handled promptly and correctly goes beyond that of any agency I have seen in my 20 years of working with insurance brokers.'

Karen Siebert, CFO
Great Mills Trading Post

'We rely on the recommendations of Reilly Benefits to provide plan options for our employees in a way that controls our costs and we feel great relief knowing that they keep us abreast of health care legislation and other issues that affect the managemnent of our plans.'

Regina Anderson
Vice President
Dennis Anderson Construction
'Our experience with Reilly Benefits has been very positive. The courteous and friendly staff has taken care of our every need. Their knowledge and dedication have afforded us the opportunity to thoroughly explain the benefits and importance of insurance coverage to our employees. I would highly recommend this organization to any individual or business for all types of insurance or tax planning.'

Dottie Wyatt, Controller
Atlantic Cycle & Power

'Our experience with Reilly Benefits has been very positive. The courteous and friendly staff has taken care of our every need. Their knowledge and dedication have afforded us the opportunity to thoroughly explain the benefits and importance of insurance coverage to our employees. I would highly recommend this organization to any individual or business for all types of insurance or tax planning.'

Dottie Wyatt, Controller
Atlantic Cycle & Power

Benchmarks

Reilly Benefits, Inc. works with employers in a wide variety of industries. This allows us to understand the uniqueness of specific benchmarks within certain industries and among different market sizes.

Our ability to help employers compare and contrast a benefit plan to these benchmarks provides our clients an advantage in the ultimate goal to attract and retain quality employees.

Professional Employee Benefits Specialists

Contact us

Reilly Benefits, Inc

5419 Deale-Churchton Rd. Churchton, Md. 20733

Professional Employee
Benefits Specialists

Telephone: 1-410-867-0261

Fax: 1-410-867-0262
info@reillybenefits.com

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