Are Employee Benefits Always Pre-tax?

No. No They are not.

Employer provided benefits are only free from taxes when the company structures the plan correctly.

This involves some strategy on the part of the employer and some effort and know-how on the part of the broker.

This is why it is important to partner with the right broker and not one that cuts corners or “forgets” important things like helping to ensure you're not unwittingly cheating on your taxes!

What Makes Fringe benefits Pre-Tax?

You may have heard of cafeteria plans or maybe you heard an accountant or HR professional talk about Section 125. These are one and the same. Section 125 of the IRS Tax Code sets up and allows for cafeteria plan benefits. This means that an employer can offer pre-tax benefits to employees while enjoying the benefits of lower employer payroll taxes as well. There are some technical issues around cafeteria plans and how they are structured. More complex decisions like whether the plan is a premium-only plan, a Health Savings Account, a Flexible Spending Account, a Dependent Care Assistance Plan, or a fullblown consumer driven health care plan (CDHC).

We won’t get into the differences because quite frankly, you don’t need to know unless your broker stinks and you refuse to get a new one. If you work with us, we will navigate you through these and make sure you are on solid compliance standing.

However, if you fail to create the plan documents required under Section 125, and you are giving yourself and your employees pre-tax treatment of benefits in your payroll system, then you are in jeopardy. You are not technically eligible to do so…. And you are breaking the law.

Now, sometimes a carrier or plan, or your broker has set up a cafeteria plan correctly and you just don’t know about it or where to look. Ask your broker. If they say something like, “well, we can create a plan, but we charge for that…” You might have the wrong broker.

There are Some Benefits That You DON’T WANT to pay pre-tax

Some fringe benefits like life insurance, disability insurance, and long-term care insurance are good examples of plans you do not want to treat as untaxed. Why? Because if you don’t tax the premium, then the benefit payouts will be taxed as income. If you post-tax those deductions, then the benefit is not taxed. Be careful and talk to a tax expert about your deduction decisions and what should be taxed.

What to Do If You Have Been Acting Like You Have a Pre-Tax Plan, But Don’t:

It is simple. Get yourself an expert broker through Employee benefits NJ and have us either dig up your plan’s documents or create compliant ones that will protect you.

It isn’t rocket science, but it also isn’t a DIY project that you want to risk fees, penalties, and jail time over. Just fix it and make sure you have someone who understands payroll taxes and benefits and how they work together.