Employers are legally required to offer certain employee benefits such as workers' compensation and unemployment benefits, while additional benefits are a gesture of goodwill from the employer to the employee — at least in theory. In reality, every business owner knows that to attract and retain quality employees you have to offer a solid benefits package.
What additional benefits should you offer? Well, the answer to that is entirely up to you. However, most employees have come to expect certain benefits from their employer. At the forefront of those benefits are 401(k) and Section 125 (or flexible spending) accounts. 401(k) Retirement Accounts
A 401(k) retirement account
is a plan that rewards long-term retirement savings by employees. These accounts have many advantages, but the primary incentive to invest in the account is tax-based, i.e. the employee is permitted to defer taxes on certain income that is related to the account.
Tax-deferred income sheltered under 401(k) plans takes a variety of forms including employer contributions, employee contributions and interest earned by the account. The employee will eventually have to pay tax on these amounts, but not until the money is withdrawn, usually starting at the mandated minimum age of 59 1/2 years (penalties apply if the withdrawal occurs sooner.)
The other big advantage of 401(k) plans for the employee is that 401(k) accounts can be "rolled over" or taken with the employee from one job to another. This allows the employee to leverage the long-term benefits of the account without incurring penalties.
Although many employers choose to match a certain percentage of the employee's contribution, there is no requirement for the employer to do so. Section 125 (Flexible Spending) Accounts
Section 125 Flexible Spending Accounts (FSAs) are named after the section of the Internal Revenue Code that provides for their existence. Just like 401(k) plans, FSAs give employees the ability to avoid paying taxes on certain qualified expenses. Section 125 allows for two categories of expenses to fall under this exemption: Out-of-pocket healthcare expenses and dependent child/elder daycare expenses.
In a healthcare FSA
, the employee is permitted to put a percentage of his/her salary when calculating the FSA
on a pre-tax basis. When healthcare costs arise, the employee pays them and then submits a receipt to the FSA administrator for reimbursement. Dependent day care FSAs are similar to the healthcare FSAs except for the obvious difference that the qualified expenses must be related to daycare costs for children and/or elderly dependents.
FSAs are a good deal for employees. However, there is a catch. Any FSA funds that remain unclaimed at the end of the plan year must be forfeited. This forces the employee to be conservative when estimating the annual FSA election. Also, employees need to be aware that not all healthcare and dependent care expenses qualify for reimbursement. To avoid unpleasant surprises, check with your plan provider to find out what expenses are covered and distribute that information to your employees.
Compared to other employee benefits, both 401(k) plans and FSAs require little financial outlay on the part of business owners. Yes, there is an added administrative burden, but those expenses are minimal compared to the cost you may incur by not offering these benefits.