Pre and Post-Tax Benefits: Understanding the Difference | American Fidelity

The taxation of supplemental health benefits, such as accident and disability insurance, may vary. Pre-tax and after-tax benefits can lead to savings, but understanding the differences between the two is crucial so employees know what’s best for their bottom line.

what are profits before taxes?

In short, with pre-tax benefits, the cost of the benefit is deducted from an employee’s paycheck before income and employment taxes are applied. As a result, this reduces the total amount of income taxed, which reduces the income taxes that the employee must pay.

Reading: What is pre tax health insurance

Section 125 of the Internal Revenue Code (IRC) allows these payroll deductions to be taken on a pre-tax basis for certain benefits. Eligible benefits that are typically before taxes are:

  • flexible spending accounts (fsas)
  • health savings accounts (hsas)
  • cancer insurance
  • accident insurance
  • dental and vision insurance
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    an example of how pre-tax benefits can be more beneficial is when it comes to employee hsa and fsa accounts. By taxing reimbursement account contributions on a pre-tax basis, employees will experience immediate savings since they are contributing on a pre-tax basis. Choosing pre-tax on your benefits will give employees a tax break on their current taxes, which can be valuable depending on your financial situation. Plus, these plans’ reimbursements for qualified medical expenses are tax-free. thus, employees save when contributing to the reimbursement account and when benefits are paid.

    learn how a section 125 plan works

    what are profits after taxes?

    After-tax benefit contributions are taken from an employee’s paycheck after taxes have already been deducted. This means that the employer and the employee will owe more income and employment taxes, but the employee generally will not owe any income tax on the benefits when he uses the plan in the future.

    One of the most common plans paid for after taxes is disability insurance. If the disability premium is deducted from your wages before taxes, or if the premium is paid by the employer, the benefits will be taxed at the time they receive the claim payment. After-tax premiums are generally preferred because employees will not have to pay taxes on future benefits if they become disabled.

    Are there advantages to either option?

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    It is important to understand the difference between pre-tax and post-tax benefits because choosing one or the other could disadvantage the policyholder, depending on the type of benefit. Pre-tax contributions reduce overall taxable income and provide an immediate tax break for employees. it is advantageous for pre-tax benefits when current tax savings are needed. however, with pre-tax contributions, taxes may be due in the future when benefits are used.

    After-tax contributions to benefits do not reduce the overall tax burden, but may provide future relief when it is time to use benefits. they may not provide tax breaks at first, but an after-tax deduction can result in savings down the road

    This blog is current as of July 2020 and has not been updated for changes in law, administration, or current events.

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