New Year's Reminder: The value of Tax-Advantaged Benefits

By SHRM Online staff December 19, 2013

As employees plan their benefit contributions for the new year, it's an excellent time to remind them about the value of tax-advantaged benefits options that may be available through the workplace. “Tax advantaged benefits can reduce adjusted gross income, which results in reduced federal and state income tax bills, since contributions are made pretax through salary reductions,” said Natasha Rankin, executive director of the Employers Council on Flexible Compensation (ECFC), in a news release. The most popular pretax benefits are:

  • Flexible spending accounts (FSAs) , which became more flexible–and less risky‒when the IRS amended the year end “use it or lose it” rule to allow a $500 carryover of unused funds in a health FSA, which many employers plan to adopt starting with 2014 FSA contributions. According to the ECFC, employees who contribute $500 to an FSA can save approximately $125 in taxes. Those who make the $2,500 maximum contribution allowed in 2014 will realize around $625 in savings. (These calculations and the ones that follow are based on a 25 percent marginal federal tax rate for individuals filing separately with income ranging from $36,251 to $87,850, and a 25 percent marginal federal tax rate for married couples filing jointly with income ranging from $72,500 to 146,400.)

  • Health savings accounts (HSAs) are growing more prevalent , and "participants would be wise to start making arrangements now to ensure they fully fund their 2013 plans by the April 15, 2014, deadline," the ECFC advised. As long as qualifying high-deductible health plan coverage was in place in 2013, individuals with single coverage can contribute $3,250, while married couples can contribute $6,450. As an added bonus, individuals ages 55 and older can contribute another $1,000 per year to their own HSAs. The council calculated that this amounts to approximately $812.50 in tax savings for an individual, $1,900 for a family and an additional $250 for those 55 and older who make catch-up contributions. ( For plan year 2014 , contribution limits rise to $3,300 for individuals and $6,500 for families.)

  • Dependent-care FSAs are often an overlooked and underused tax-savings opportunity that allows for a pretax contribution of up to $5,000 a year–offering approximately $1,250 in tax savings to pay for qualified individuals’ eligible work-related expenses, such as day care, preschool, baby-sitting and elder care.

  • Commuter/transit FSAs permit pretax income to be used for qualified transit, transportation and parking benefits. As of Jan. 1, 2014, the transit portion of the commuter benefit will be $130 a month and $250 a month for parking. This offers $390 in annual tax savings for those taking public transportation and $750 in savings for those who drive and park, according to the ECFC.

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