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January 2, 2020

Pre-Tax Deductible Plans: Expectation Vs. Reality

Introduction

As more companies begin to offer pre-tax deductible plans it’s important that employees learn what they are all about. The word “deduction” can be a scary word when it comes to your paycheck. As experts in pre-tax plans, we are here to explain what exactly a pre-tax plan means for you and your paycheck. First, let’s talk about what a pre-tax deduction means.

What is a Pre-Tax Deduction?

A pre-tax deduction is some form of a plan that allows employees to elect certain dollar amounts to be placed into certain financial accounts prior to any payroll taxes on their paychecks. Some of these plans are Flexible Spending Accounts, Health Savings Accounts, Health Reimbursement Arrangements, Company Health Insurance Plans, and more.

What do employees expect from a pre-tax plan?

A lot of employees believe that by allocating a certain dollar amount before they get their paycheck means they will make less money.

What does the pre-tax deductible plan do?

By allocating a certain dollar amount that you elect into these accounts your income tax liability is lowered. Meaning you pay less for income tax and you now have funds placed into an account for any medical or childcare expenses you may incur throughout the year.

See the example below.

This chart shows what an employee’s paycheck would look like if they utilized pre-tax deductible plans and what they would take home if they didn’t.

example of pre-tax paycheck and post tax paycheck 

Closing

In closing, pre-tax deductible plans may seem scary, but there is no reason to fear them. To learn more about different types of plans visit some of the following links:

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