Maximizing your menu of employee benefits

If you are a typical employee working for a U.S. company, chances are it’s time for you to renew your annual employee benefits for 2006. You’re faced with a “cafeteria” of choices so you can customize benefits to your taste. Flexible spending accounts, healthcare savings accounts and premium-only plans are just a sample of what’s on the menu. But do you know what to put on your plate?

If you’re like many workers, you usually decide to forego those options because they’re either too complicated or too scary for you to consider. According to the Employee Benefit Research Institute, only 8 percent of full-time workers opt for a cafeteria plan or, referring to its IRS code section, 125 plan. But that decision will no longer fly in the future as more companies pull back from covering the majority of their employees’ healthcare bills. 

“As healthcare costs and workers comp rates continue to rise, 125 plans will become more popular with employers,” said Leonard Sanicola, senior practice leader at WorldatWork, a nonprofit association for compensation and benefits education. “2006 will be the year when you see large employers offering these plans in conjunction with traditional plans, with the goal down the road of making 125 plans the only ones offered so that employees become more accountable for their expenses.”

But these plans can benefit you as well as your employer, with their biggest advantage to you being the reduction of your tax bill by hundreds of dollars.

“They’re the most cost-effective benefits to have,” said Dana Sippel, a certified financial planner and certified public accountant in McLean, VA. “You can set aside money on a pretax basis, so it’s not only free of Federal and state taxes, but Social Security and Medicare taxes too.”

Here’s a rundown of the cafeteria plans most offered by companies currently.

Premium-only plans
Premium only plans, or POP, (also known as premium conversions), are the most basic arrangements, allowing you to pay for your contributions to health and insurance premiums in pre-tax money through payroll deductions. You reap the “discount” by not paying taxes. For example, if you’re in the 30 percent tax bracket and you put away $100 monthly in a POP, essentially you’re only paying $70 in premiums since they’re not being taxed.

Sanicola said these plans are a win-win for employees, but he cautions those close to retirement from using a POP. “If you’re a year or two from retirement and paying a lot for healthcare, switching to a POP and its pre-tax premiums could impact your Social Security payments because they’ll reduce your income that the payments are based on.”

Dependent-care flexible spending accounts
Flexible spending accounts (FSAs) lets you put pre-tax dollars through regular payroll deductions into an account for healthcare or dependent care, and you can tap that account to pay for any qualified, unreimbursed expenses you have during the calendar year.

Like POPs, the upside is you get a “discount” on the money you would have paid otherwise in income taxes. So if you’re in the 25 percent tax bracket and put $3,000 in an FSA, you theoretically will be saving $750 in medical bills. The downside: You must budget accordingly and do it a year in advance, putting just enough money in your account since a  “use it or lose it” clause means any money you don’t spend by year’s end is lost. Even worse, you don’t get it back — your employer does.

With an FSA for dependent care, you’re allowed to bank up to $5,000 per year ($2,500 if you’re married and filing single) to pay for care given to children, elderly parents and handicapped dependents.

The big caveat with a dependent-care account is that using it makes you ineligible for using the childcare credit ($3,000 per child) on your tax return. Therefore, you should look at which method gives your family the most bang for its buck, usually depending on the number of children you have and your income.

Sippel believes the FSA is the better bet for most families. “Say you pay 38 percent in Federal and tax savings, you can get $1,900 in savings through a dependent-care FSA. Even at the higher $6,000 for two children, the tax credit only earns $1,200 in savings. If you have children, you definitely should be opting for the FSA.”

Employees who take care of their parents can also use this FSA, but the rules about what qualifies as dependent-care are trickier. Sippel says it applies to people who may more than 50 percent of their dependents’ support.

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