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Pre-Tax Deductions

Pre-tax deductions are the money taken from an employee’s paycheck before tax. The most frequent forms of pre-tax deductions are:

  • Health insurance
  • Group-term life insurance
  • Retirement plans

There are many other forms of pre-tax deductions like commuter benefits, parking permits, child care expenses, and tax-deferred investments. Employees are not obliged to participate in pre-tax deductions. However, it is often in their best interest to do so for a couple of reasons.

Pre-Tax Deductions Matter

Most forms of pre-tax deductions involve participation in programs that benefit the employee in the long term. While the take-home pay for the particular payment cycle is lower, workers benefit from nearly all forms of pre-tax deductions. That is especially true of the top-three deductions.

Health Insurance  

Even basic private health insurance plans cover at least some of your healthcare expenses. These include doctor’s visits, emergency room visits, and treatment you receive. Depending on the policy your employer signs, you will have no reason to worry about even large hospital bills for major surgery.

Private health insurance providers have a network of doctors they work with. You can choose the specialist you would want to visit from the list and will not have to pay excessive fees. Public healthcare plans like Medicare don’t allow much freedom of choice. This can make all the difference when your well-being is at stake. With a private healthcare plan, you will have the chance to choose from more treatment options. Hopefully, some of them will be more suitable for your condition than the ones offered by a public plan. Healthcare pre-tax deduction is well-worth  the expense.

Group-Term Life Insurance

The group-term life insurance scheme is a life insurance plan that covers all employees that decide to participate. It guarantees financial assistance to the employee’s beneficiaries should the worst happen. These plans are popular in companies that are part of traditionally dangerous occupations. That doesn’t mean employers in safer industries, like office work, for example, do not offer them as well.

Some of the main benefits of this form of pre-tax deduction payment include:

  • Default insurance cover – employees receive life insurance cover by simply deciding to participate. Most of the hassles of arranging individual life insurance are eliminated. That includes the necessity for medical check-ups.
  • Gratuity funding – both employer and employees benefit from the assistance in creating funds for future gratuity liability.
  • Customization – even though it is a group plan, employers can customize it to fit each employee’s needs.

Group-term life insurance is usually more cost-efficient than individual plans. This is another great reason when deciding whether or not to participate in this form of pre-tax deduction.

Retirement Plans

Along with health insurance, retirement plans are probably the most popular type of pre-tax deduction. Employers who want to make the best for their workforce try to find a good retirement plan to offer them. This pre-tax deduction provides returns on investment and financial backup for emergencies. A good retirement plan is cost-effective as well. You can ensure your financial security in old age by paying relatively little each month. Experts like to point out that retirement plans guard your savings against inflation as well. Some of the best retirement plans out there may even allow you to retire earlier than the national average. So, what are the best retirement plans employers offer as a pre-tax deduction to their employees?

  • Solo 401 (k)
  • The IRA plans
  • Defined contribution plans
  • Traditional pensions
  • Guaranteed income annuities
  • The Federal Thrift Savings Plan
  • Cash-value life insurance
  • Nonqualified deferred compensation plans
  • Cash-balance plans

Tax Benefits

The most obvious selling point of pre-tax deductions is in their name. Employees who opt to participate in some of the pre-tax deduction plans on offer by the company reduce their taxable income. As a result, they have to pay less in taxes at the end of the year.

Employers who provide pre-tax deduction plans reap some tax benefits, as well. This is particularly true for businesses that pay State Unemployment Insurance (SUI), Federal Insurance Contributions Act (FICA), and Federal Unemployment Tax Act (FUTA) taxes. Thanks to them offering pre-tax deduction benefits to their workers, they have to pay significantly lower rates for these taxes.