Cafeteria Plans & Pre-Tax Benefits - What’s on your Tray?
Cafeteria Plans & Pre-Tax Benefits
What’s on your Tray? Trying to get more for your money has become an American pastime. Retailers always have sales; the auto industry continually offers different incentives; and restaurants come up with new promotions all the time. Over the years, consumers have embraced these discounts and have become accustomed to paying less than full price whenever possible. Besides paying discounted prices, another way to get more for your money is by purchasing goods and services with “pre-tax dollars” versus “after-tax dollars.” Remember, because of income taxes, $100 of pre-tax dollars is equivalent to approximately $140 of post-tax dollars. The Cafeteria Plan One place to find a variety of pre-tax opportunities is in your benefits package at work. Most employers offer benefits to their employees through a "cafeteria plan," which allows you to select your benefits, such as medical and dental insurance, from the options provided through the plan, and to pay for only those benefits that you select. As a participant in a cafeteria plan, your employer will give you an allowance to purchase your benefits through the plan. If your allowance exceeds the cost of the benefits selected, the excess will be included in your paycheck as taxable wages. If the cost of the benefits you select exceeds the allowance, you will pay for the shortfall with pre-tax dollars. Flexible Spending Accounts As part of your benefits package, you probably have the option to set aside a portion of your salary, pre-tax, into your flexible spending account. Most plans allow their employees to designate up to $2,000 per year for out-of-pocket medical and dental expenses, and up to $5,000 per year for dependent care expenses. By taking advantage of your flexible spending account, you can pay for certain personal expenses with pre-tax dollars, thus getting more for your money. The downside to flexible spending accounts? If you don't use it, you lose it. In other words, if you set aside money in your flexible spending account, but don't have enough expenses to cover the amount you set aside, the excess will not be paid out to you. Instead, any money remaining in your flexible spending account at the end of the year will be lost. Annual Benefits Review Because many employers allow you to change certain benefits only once a year (usually in the fall), contact the benefits department now to review your options. During your review, ask about the different pre-tax opportunities available through your employer's benefit plan. Only by planning ahead can you take full advantage of the benefits in paying personal expenses with pre-tax dollars.
|
