Guide to Your Employers Benefits Programs, Tax-Wise (401(k) matching, HSAs, Flexible, etc.)
You'll usually receive a package of benefits in addition to your salary when you work for an employer. Generally, you don't have to pay taxes on these benefits. In fact, you may actually enjoy additional tax savings through your various employer benefit programs.
Key Takeaways
- Your 401(k) contributions reduce your taxable income and can grow tax-deferred.
- Contributions to your HSA are tax-deductible, can grow tax-deferred, and withdrawals for qualified medical expenses are tax-free.
- FSAs allow you to use pre-tax dollars for medical expenses not covered by insurance, though you'll likely lose any unspent funds at the end of the year.
- Your employer is typically required to provide unemployment and workers' compensation insurance without tax consequences to you, and they are also required to cover half of your Social Security and Medicare taxes.
401(k) matching
If your employer offers a 401(k) plan, it can be a great way to invest for your retirement. Your 401(k) contributions reduce your taxable income, and they grow tax-deferred until you take money out of the account.
Jeff Gonzalez, CPA and CFO at Los Angeles-based Electric Entertainment, says, "A 401(k) match is one of the best benefits you can get from your employer." In a 401(k) match, your employer deposits additional money into your account based on the amount you contribute. Typically, an employer will match up to 50 percent of the first 6 percent of your income that you contribute to a 401(k).
Gonzalez notes, "Even though a 401(k) match is money paid from your employer for your benefit, you don't have to report that match as income, and you don't have to pay tax on it when you receive it." You will owe tax on the matching funds when you withdraw them from your 401(k), as you will on all of your contributions and earnings.
Health Savings Accounts
A Health Savings Account is a tax-deferred way to help cover the costs of a high-deductible health insurance plan. Money you put into an HSA is tax-deductible, within limits. The money in your HSA can be used to pay medical costs if you haven't yet reached your deductible.
The limit to your HSA contribution is the lesser of your health plan deductible or IRS-prescribed limits. For 2024, the IRS limit increased to $4,150 if you were covered under an individual health plan, or $8,300 if you are covered under a family plan. For 2023, the limit is $3,850 for individual coverage and to $7,750 for family coverage. the limit jumps again to $4,300 and $8,550, respectively, for 2025. For any year, you can put away an additional $1,000 if you're 55 or older.
Gonzalez says some employers offer high-deductible health plans, or HDHPs, because they keep company costs low. "To protect employees from the higher deductibles," he says, "many employers offer an HSA concurrently with an HDHP." The true benefit of an HSA comes when your employer makes your contributions for you. "Since you're saving them money by accepting a high-deductible health plan, many employers will make contributions to an HSA on your behalf," says Gonzalez.
TurboTax Tip:
Your employer’s matching contributions to your 401(k) account typically aren't taxed until you withdraw them.
Flexible Spending Accounts
A flexible spending account is similar to an HSA, but with a few important differences. An FSA provides the same type of tax benefits, as the money you contribute comes out of your paycheck before you pay tax on it. However, the money in an FSA is generally used for medical expenses not covered by insurance, rather than for covered costs that are incurred before your deductible is met.
For example, you might use your FSA money for dental or vision expenses that may not be covered at all by your insurance. There is, however, no restriction on using your FSA funds to cover your deductible.
According to Gonzalez, "An important drawback of a Flexible Spending Account is that it operates under a 'use it or lose it' provision. Any money in your FSA that you don't spend by the end of the year vanishes. This is in marked contrast to an HSA."
For 2024, the FSA contribution limit is $3,200, and will be indexed annually for inflation. This amount increased from $3,050 for 2023.
Insurance and tax benefits
Some employers are required to provide numerous insurance and tax benefits to employees. Your employer pays for your unemployment insurance, allowing you to receive payments if you lose your job. You'll also benefit from workers' compensation insurance to cover your medical expenses if you get hurt on the job. Both of these benefits are provided without tax consequences to you, even though you are being provided with a valuable benefit for free.
If you work for an employer, rather than for yourself, you'll also save on taxes. As an employee, you have to pay only half of your Social Security and Medicare taxes. Your employer must pay the other half. This is a benefit that you can enjoy only as an employee, since if you're self-employed you have to pay both portions of these employment taxes.
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