An employee can reduce their taxable income and avoid paying Social Security and Medicare Tax (5.65%) and Federal Income Tax (15% to 40%) by enrolling in a company-sponsored Flexible Benefits Plan. These tax savings can apply to one or more of the following options:
- Premium Conversion Accounts, or Premium Only Plans (POP), allow for the employee portion of qualifying group insurance premiums to automatically be deducted from pay with TAX-FREE dollars.
- Health Care Flexible Spending Arrangements (FSA) allow employees to pay for health care expenses for themselves and their families which are not covered by health/dental/vision insurance, including dental, vision, orthodontia, etc. (even those deductibles or co-pays which are the patient’s responsibility), with TAX-FREE dollars.
- Dependent Care Assistance Program (DCAP) allows you to pay for child daycare or dependent care expenses up to $5,000 per year TAX-FREE.
The money is held in the plan until you submit a request for reimbursement or your employer pays insurance premiums.
You can include expenses for your spouse if you are legally married and file a joint income tax return. You may cover your children’s expenses if you claim them as dependents on your tax return.
What ASi Does
- Draft Plan Documents including Plan Document, Summary Plan Description and Corporate Resolution
- Non-Discrimination Testing
- Assist in Plan Design
- Assist Broker in Plan Presentation
- Assist in Group Enrollment
- Provide Claims Procedures
- Enter Claims Daily and Disburse Checks Weekly
- Provide Monthly, Quarterly, Annual Reports
- Year-End Plan Review
- Provide Online Access
- Provide Debit Cards if Elected by Employer
How You Save Taxes
When you participate in a Flexible Spending Arrangement via salary reduction, you reduce your Federal Income Tax, FICA, Social Security and Medicare, and increase your take-home pay. The money that is deposited into your Flexible Spending Arrangement comes straight out of your gross pay; therefore avoiding taxes.
The following example shows how a single person making $30,000 per year can save $1,692 in taxes annually by contributing $550 per month to an FSA.
Tax Savings Illustration
|Gross Monthly Salary||$2,500.00||$2,500.00|
|Qualifying Insurance Premiums||$0.00||$100.00|
|Qualifying Health Care Expenses||$0.00||$100.00|
|Qualifying Dependent Care Expenses||$0.00||$350.00|
|Total Qualifying Expense||$0.00||$550.00|
|Gross Taxable Income||$2,500.00||$1,950.00|
|Income Tax @20% plus F.I.C.A. @5.65%||$641.25||$500.18|
|Net Spendable Income||$1,858.75||$1,449.82|
|Post-tax Insurance Premiums||$100.00||$0.00|
|Post-tax Health Care Expenses||$100.00||$0.00|
|Post-tax Dependent Care Expenses||$350.00||$0.00|
|Total Post-tax Expenses||$550.00||$0.00|
|Net Spendable Income||$1,308.75||$1,449.82|
|Increase in Monthly Spendable Income||N/A||$141.07|
|Increase in Annual Spendable Income||N/A||$1,692.84|
As you can see, with only $550 in monthly qualified expenses, by enrolling in the Plan, you would have an extra $141.07/month ($1,692.84/year) of spendable income, the amount you would otherwise be paying in taxes.