Do You Know the Tax Advantages of Employer-Offered Benefits?
Which benefits offered by your employer are you taking advantage of? Do you know all of the benefits available to you? Not only do many employer-offered benefits provide impactful resources to you and your family, but some save you significant money and taxes. Below is a list of benefits that your employer may offer and the tax benefits of each. If you’re unsure of what is available to you, we recommend asking your employer for more information.
For a company that has 50 or more employees, the Affordable Care Act (Obamacare) requires the business to offer at least 95% of its full-time employees and their dependents (but not spouse) with affordable minimum essential health care coverage or be subject to a penalty. If you work for one of these larger employers and the company picks up the entire health insurance premium cost, consider yourself lucky, as the costs of health insurance coverage have risen dramatically over the last few years.
The tax-free benefit of what the employer covers is valuable. If you aren’t aware of the value of this nontaxable employee benefit, you can look at your Form W-2, box 12a, code DD, which shows your share of the cost of employer-sponsored health coverage.
Although some larger employers may provide a company-funded retirement plan that will pay you a monthly benefit when you retire, most generally offer 401(k) plans with which an employee can save for retirement by making pre-tax contributions of up to $19,500 for 2020. And if the employee is age 50 or over, they can qualify to make a catch-up contribution of up to $6,500, bringing the total to $26,000. Some employers also match their employees’ contributions up to a certain amount, which means an employee should endeavor to contribute at least the amount that the employer will match.
Qualified Transportation Fringe Benefits
Certain transportation-related fringe benefits that an employer may provide to employees are tax-free to the employee, and the employer can deduct the cost. For 2020, the limit on tax-free employer reimbursements is $270 per month each for qualified parking, transit passes, and commuter transportation.
Flexible Spending Account (FSA)
This is a special account established by an employer that allows employees to contribute to the account through salary-reduction contributions. The benefit is that the contributions are pre-tax, meaning the employee doesn’t pay taxes on the money contributed to the account. The FSA account can be used to pay for health plan deductibles, co-payments, and even some over-the-counter-medications with pre-tax dollars. The annual limit on contributions is inflation adjusted and is $2,750 for 2020. However, if you don’t use the money in your FSA, you’ll lose it.
Group Term Life Insurance
The cost for the first $50,000 of group term life insurance (GTLI) coverage provided by an employer is excluded from the employee’s taxable income. However, the employer-paid cost of group term coverage in excess of $50,000 is taxable income to the employee, even if he or she never receives it.
Employer-Provided Education Assistance
An employee doesn’t have to include in his or her income amounts paid by the employer for educational assistance under a qualified education-assistance program. The maximum amount of educational assistance that an employee can exclude is $5,250 for any calendar year. Excludable assistance under a qualified plan includes, among others, tuition, fees, books, supplies, and equipment. The education is any training that improves an individual’s capabilities, whether or not it is job-related or part of a degree program.
An employee may exclude amounts paid or expenses incurred by the employer for qualified adoption expenses connected to the employee’s adoption of a child, if the amounts are furnished under an adoption-assistance program in existence before the expenses are incurred. If the adopted child is a special needs child, the exclusion applies regardless of whether the employee actually has adoption expenses. The maximum exclusion amount is inflation adjusted annually and is $14,300 for 2020 per child, for both non-special needs and special needs adoptions. The exclusion is phased out when the employee’s modified adjusted gross income is between $214,520 and $254,520 for 2020. Taxpayers can claim a tax credit for qualified adoption expenses, subject to the same phaseout range as for the exclusion, but any excludable employer-paid expenses can’t be used for the credit.
Child and Dependent Care Benefits
Qualified payments made or reimbursed by an employer on behalf of an employee for child and dependent care assistance are excluded from the employee’s gross income. The amount of the exclusion is limited to the lesser of $5,000 ($2,500 for married individuals filing separately), the employee’s earned income, or the income of the employee’s spouse. A child and dependent care tax credit is available to taxpayers, but no credit is allowed to an employee for any amount excluded from income under his or her employer’s dependent care assistance program.
Health Savings Accounts
Employees who have a high-deductible health plan through their employer can open a health savings account (HSA) and make annually inflation-adjusted pre-tax contributions, which, for 2020, can be up to $7,100 for families and $3,550 for a single individual. When distributions are made for medical expenses, the money comes out tax-free. However, distributions not used to pay qualified medical expenses are taxable, and if the plan’s owner is under the age of 65, nonqualified distributions are subject to a 20% penalty. Some individuals let the account grow and treat it as a supplemental retirement plan, waiting until after age 65 to begin taking taxable but penalty-free distributions.
If you have any questions about how job-related benefits might apply to you or if you are an employer interested in providing any of these benefits to your employees, please contact RBI member Cray Kaiser.