What's the next best thing to compensation? Most individuals would cite employee benefits. In fact, it can be argued that employee benefits may be preferable to compensation when they are tax-free.
For instance, suppose an employee is in the combined 40 percent tax bracket, taking into account both federal and state taxes. If the employee receives a $10,000 raise from an employer, he or she pockets just $6,000 after-taxes. On the other hand, if the employee gets a $10,000 tax-free employee benefit, he or she comes out $4,000 ahead.
Of course, taxes aren't the only factor in the equation. But employees must consider this aspect when they weigh the value of the benefits they may claim.
Typically, the term "employee benefits" is used to describe health insurance, life and disability income insurance, qualified retirement plans, vacation plans, employee stock options and the like. These are all tangible benefits. But intangible benefits -- such as appreciation from a supervisor for a job well-done or a friendly work environment -- are also prized by employees. Don't overlook their importance.
Finally, other employer-sponsored vehicles, such as flexible spending accounts (FSAs) and Health Savings Accounts (HSAs), may allow employees to maximize the available benefits. The government has established specific rules relating to these devices.
Do you think you know everything you need to know about employee benefits? Here's a brief quiz to test your knowledge.
1) Which of the following statements about health insurance is true in 2012?
a) Employers are not legally required to provide health insurance to employees.
b) Employers must offer employees a choice of health insurance plans.
c) Employees are legally required to contribute to employer-sponsored plans.
d) Employees must participate in an employer-sponsored plan.
2) Which of the following is NOT treated as an employer-sponsored retirement plan?
a) 401(k) plan
b) 403(b) plan
c) SIMPLE-IRA
d) Roth IRA
3) What is the legal limit on contributions to a flexible spending account in 2012?
a) $1,000
b) $2,500
c) $5,000
d) There is no limit.
4) The limit on tax-free life insurance coverage under an employer-paid group plan is:
a) Zero.
b) $50,000.
c) $100,000.
d) There is no limit.
5) The limit on tax-free disability income insurance coverage under an employer-paid group plan is:
a) Zero.
b) $50,000.
c) $100,000.
d) There is no limit.
6) If an employee receives a year-end bonus, the bonus is taxed at the rate of:
a) 15%.
b) 25%.
c) 35%.
d) Whatever tax bracket the employee is in.
7) If an employee receives vacation pay, the vacation pay is taxed at the rate of:
a) 15%.
b) 25%.
c) 35%.
d) Whatever tax bracket the employee is in.
Answers: 1-a; 2-d; 3-d; 4-b; 5-a; 6-d; 7-d |