While constructing your company’s benefits package, it’s important to weigh out and examine which benefits are covered by after-tax deductions and which are covered by pre-tax contributions.
So, which is better, pre-tax, or post-tax? In short, both pre-tax and post-tax benefits have positive and negative effects.
We’ll break down each type to help you determine the best way to optimize tax savings and provide a benefits package that helps attract and retain the top talent you want.
Taken out of an employee’s pay before taxes, pre-tax benefits can include items like insurance premiums, contributions to retirement plans, dependent care programs, and transportation benefits.
A pre-tax deduction helps lower tax liabilities for both employers and employees.
The value attributed to the benefit is taken out of the employee’s wagesbefore federal and employment income taxes are applied.
By withholding deductions before those taxes, you effectively lower taxable earnings and reduce federal tax withholdings on your workers’ wages.
Your employees will thank you for the tax break, reducing the federal income tax they must pay.
Some benefits are excluded under federal tax withholding laws, and what is and is not approved changes constantly, making it difficult to stay up to date. It’s best to get proper tax advice from an accountant.
What Are the Benefits of Pre-Tax?
The greatest benefit of pre-tax is that the cost of the benefit is taken out of an employee’s paycheck before federal income tax and employment taxes are calculated.
This lowers the employee’s taxable income because it reduces the amount of federal income tax that the employee must pay.
What Are Examples of Pre-Tax Benefits?
It can be time-consuming and expensive to decide which benefits to provide to employees before taxes are paid out to give both of you a tax advantage.
This list offers a quick overview of some of the typical benefits that are covered by deductibles before taxes.
TIP: The benefits you offer need to keep up with the changing expectations of your employees. Edenred can help you enhance your benefits package and optimize pre- and post-tax benefits.
1. Medical Expenses and Health Savings Accounts (HSAs)
Funded by both the employee and employer, health savings accounts are also considered pre-tax groups. It allows employees to place pre-tax dollars aside and use them free of additional taxes for certain healthcare needs such as copayments and deductibles.
The money is removed from an employee’s paycheck, lowering their gross income. The funds in the account roll over every year.
Any interest accrued is free of taxes, there are tax-free withdrawals, and the employee retains the money even if they leave their job, making this a very attractive option.
2. Dental, Life, and Accident Insurance
Typically, the employer splits pre-tax contributions to the premiums with their employees.
Health and dental insurance are both popular before-tax benefits; life and accident insurance, even if a voluntary benefit, can be paid with pre-tax income, giving tax advantages to the company and their workers.
3. Retirement Plans & Contributions Like Pre-Tax 401(k)
The pre-tax 401(k) retirement account has several advantages, besides being easy and affordable:
- In 2024, the 401(k) contributions limit will be $23,000in employee contributions and have a cap of $69,000 as the combined employer and employee contributions.
- Employees 50 years of age or older are also eligible for an additional $7,500 in catch-up contributions, raising that employee’s before-tax 401(k) contributions to a limit of $30,500.
- The 401(k), 403(b), and traditional Roth IRA plans are all pre-tax, but depending on the exact plan, an employee may have to pay taxes when they go to withdraw funds.
TIP: It can be difficult to determine which will benefit your employees most. Consider a tax advantage comparison chart of tax and Roth contributions, Roth contributions versus 401(k), any additional taxes, and when they can be withdrawn tax-free to determine what will leave your employees with more money.
4. Commuter and Transportation Benefits
Commuter benefits allow employers to deduct the cost of transportation associated with getting to and from work, like transit passes, directly from an employee’s paycheck on a pre-tax basis, lowering the taxes the employee must pay.
If you provide an employer subsidy for commuting, unused funds are returned to the company when an employee leaves.
Edenred’s Prepaid Card can be used at any compliant location that sells transit or parking items only.
Commuter benefits can help employers save on payroll taxes (up to $40 a month for each participating employee), and they can support green commuting initiatives with e-bikes and e-scooters.
Though considered a post-tax benefit, there is a way to get new shared micromobility options integrated into one commuter account.
Edenred will even identify pre-tax eligible expenses, so your company and employees continue to receive tax incentives and remain compliant with the ever-changing IRS regulations.
- Funds can be added to employees’ commuter benefits accounts via a company subsidy or direct employee funding from their payroll.
- Employees can use that money to pay for the commute of their choice.
- Edenred identifies and manages all pre-tax eligible expenses.
Alleviate worker shortages and show your workforce you care by helping your team access childcare.
There are many relevant tax credits and benefit options:
- (DCFSA) Dependent Care Flexible Spending Account: Employers can provide Dependent Care Flexible Spending Account—a before-tax benefit account to pay for eligible dependent care services.
- Educate Employees about Tax Credits: Parents can reduce tax burdens by claiming childcare expenses. Let your employees know about the Child & Dependent Care Tax Credit (CDCTC).
Post-tax benefit contributions, or post-tax deductions, are those that come out of an employee’s ordinary income after taxes.
These deductions have zero effect on taxable wages and the amount of tax owed, unlike pre-tax deductions, because they reduce net pay not gross pay.
Benefits deducted on a post-tax basis result in both employee and employer paying more in local and federal taxes, payroll tax, income tax, and employment tax, but, on the positive side, the worker won’t owe any income tax on these benefits when they use them in the future.
A post-tax deduction does impact an employee’s net income and should be managed by HR professionals who follow state and local laws regarding regulatory compliance.
Do Post-Tax Deductions Show on a W-2?
Some post-tax deductionswill show up on a W-2, such as Roth contributions, reported in Box 12, allowing the IRS to monitor the total amount contributed annually and make sure employees do not exceed the maximum yearly contribution.
What Are Examples of Post-Tax Benefits?
Some common examples of after-tax benefits you might want to include in your benefit package include the following:
Typically, health insurance is paid for with pre-tax gross income, but some employees may have post-tax premium payments.
Employers divide premiums between employees on an annual basis after taxation, but workers who don’t choose to enroll in company plans will find themselves with post-tax premiums.
It directly impacts the amount of federal taxes an employee pays and that employee’s eligibility for other benefits.
So, should you pay for health insurance before tax or after tax?
Well, this depends on the type of health insurance plan. Paying for medical insurance premiums with pre-tax dollars instead of after-tax dollars lowers the total amount of taxable income.
2. Lifestyle Spending Accounts (LSA)
Lifestyle Spending Accounts (LSA) are flexible wellness solutions providing employees with coverage for their choice of well-being options.
From fitness to meals, education to entertainment, family to pets, and more, Lifestyle Spending Accounts help reduce employee stress and increase their level of productivity and well-being.
- Customization helps selections align with the employer brand.
- Controls allow you to set geo-restrictions, eligible days, and spending limits.
- Employees get to select which options they want to use.
- Post-Tax Roth Contributions
A Roth IRA and a 401(k) are two types of post-tax retirement accounts.
Roth contributions use post-tax money. Many people find Roth IRAs preferable to a traditional 401(k), which has taxes upon withdrawal.
A Roth Individual Retirement Savings Account (IRA) is one where post-tax dollars can be added.
The earnings then grow without more taxes, and the owner can make a penalty-free, tax-freeRoth withdrawal after the age of 59.5 years and 5 years of owning the account.
After-tax 401(k) contributions give employees the power to invest additional funds into their retirement with tax-deferred growth until withdrawals.
3. Meal Allowances
Promote health, nutrition, and employee well-being by providing your team with a meal allowance.
Edenred Benefits has launchedTicket Restaurant, the most popular meal perk in more than 35 countries.
It can be used to pay for meals during working hours at local eateries, restaurants, and grocery stores, andthrough food-delivery apps with the convenience of aPrepaid Card funded monthly with a meal allowance.
- Provides flexible dining options for your team.
- Increase loyalty and help your business grow.
- Promotes good healthwith incentives to refuel with a nutritious meal.
Give your employees access to their wages early with AnytimePay.
Many households are experiencing financial difficulties right now, so having the ability to access a paycheck in advance is more important than ever.
This non-traditional feature can enhance your benefits package and help improve employee satisfaction and financial well-being,helping employers stand out and positively impact company culture.
- Employees who sign up for the program simply request funds from their next paycheck.
- They log into the paycheck advance app and choose a funding amount (up to their available limit).
- Funds are available in seconds.
- It helps employees to avoid using high-interest credit cards.
- Payments will always be processed within the same pay cycle, and payments will be deducted from the employee’s next paycheck.
Many types of policies for disability insurance, life insurance, and even health insurance premiums can be contributed after taxes.
- Life insurance premiums, or life insurance post-tax deductions, are tax-deductible as a business-related expense. Group-term life insurance is the most common post-tax life insurance deduction.
- Usually, an employee can elect to pay with pre- or post-tax contributions upon signing up for short-term disability (covers wages from 3 months to 1 year) and long-term disability (90 days to age 65) with their employer’s medical plan.
NOTE: Tax laws vary, and a tax advisor should be consulted.
The nuanced difference between post- and pre-tax benefits is something that needs to be fully understood to construct a stellar benefits package for your workforce.
Save time, money, and stress by turning to professionals who can help you define the distinctions between these two groups.
Make sure you and your employees understand what their compensation package holds and how it can best benefit all parties.
Schedule a meeting with Edenred, and we’ll help you overcome your benefit challenges today!
