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Tax-Deferred Benefits
[By LaVerne L. Dotson; JD, CPA]
As all readers of the Medical Executive-Post know, there are three categories of benefits that hospitals, healthcare systems, clinics and related medical employers typically provide to their employees, nurses, hospitalists, etc:
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Those that are totally income tax-free; some are still taxable for FICA (Social Security and Medicare).
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Those that are not taxed at their full economic value; or are taxed at a special preferential rate.
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Those in which a tax liability is not incurred until after benefits received.
Tax Deferred Benefits
There are several types of arrangements that allow employees to receive economic benefits currently without having to pay taxes until a later taxable year. Furthermore, some of these arrangements may even provide for a lower taxation rate at that time. These types of benefits are not totally excludable from income forever, however. Rather, they primarily provide deferral of taxable income.
Retirement Plans
The classic example is a retirement plan. Employers may establish pension, profit sharing, stock-bonus, or annuity plans, as well as 401(k) and 403(b) plans. The tax consequences and most of the formal requirements of these plans are similar. These plans are often referred to as “qualified retirement plans.”
The hospital employer makes contributions on behalf of participating employees. The contributions are placed in a trust fund, custodial account, or annuity contract. The funds are held and accumulated for the benefit of plan participants.
The distribution of the funds to a participant normally occurs no sooner than the participant’s termination of service with the employer, and, no later than attainment of normal retirement age, as defined in the plan. The method of distribution may be a lump-sum payment of all of the employee’s benefits, an installment payment over a number of years (usually 10 to 15), or as an annuity that provides payments over the employee’s and/or spouse’s lifetime.
The extremely favorable tax consequences of qualified retirement plans are the reason for their popularity. When the hospital makes a contribution on the employee’s behalf to the qualified plan, the employer receives a deduction for the amount contributed; however, the employee will not have to report the contribution as income until the funds are finally distributed.
Contributions to the trust or other qualified fund are accumulated tax-free. Distributions are taxable, but the recipient is generally in a lower marginal tax bracket during retirement than when contributions to the retirement plan were made. This treatment is a truly startling departure from the normal practice under the Code.
Assessment
The tax-free accumulation of income (contributions and interest) offers the hospital, clinic or other medical employee great advantage, even if his or her tax rates are the same at the time of deferral as at the time of distribution.
Conclusion
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Filed under: Retirement and Benefits |
The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants 
Voluntary Benefits Market by Seller
* Benefits Brokers 55%
* Career Agents 21%
* Traditional Worksite Brokers 14%
* Enrollment Companies 8%
* Occasional Producer 2%
Source: Employee Benefit Advisor, March 2013
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Employee Benefits
When selecting a hospital or other employer, understanding the value of the benefits offered is critical. Just because one employer may offer a higher salary doesn’t mean they are offering more total compensation than other options.
Let’s explore the value of benefits received by a 60 year-old RT employee who is married and has two kids (ages 18 and 15). We’ll assume this individual earns $51,017, which was the median average household income in 2012.
Payroll Taxes
The value of some benefits is easier to calculate than others. For instance, regardless of your income, your employer is required to pay half your FICA – Federal Insurance Contributions Act – taxes (which covers Social Security and Medicare). The combined FICA tax is 15.3% of your income, so you pay 7.65% and your employer pays 7.65%. Assuming a salary of $51,017, your employer’s FICA contribution is $3,903.
It should be noted that any employer you affiliate with will be required to contribution their 7.65% portion of the payroll tax. Of course, the actual dollar amount they contribute will increase as your salary rises. Alternatively, self-employed individuals are required to pay the full 15.3% payroll tax themselves. In comparison, a halving of the payroll tax is a significant benefit to non-self employed workers.
Retirement Plan Contributions
Of course, not all employers offer a 401k match, and the amount of the match offered varies. However, let’s assume a fairly common matching policy where the employer will match 50% of the first 6% of your salary that you contribute. Assuming you take full advantage of the match, your employer will contribute 3% of your salary to your retirement plan, or $1,530.
Paid Time Off
Most employers offer a mixture of vacation, holidays, and sick days. Assuming you get 10 days for vacation, five paid sick days, and seven paid holidays, you get a total of 22 paid days off per year. If you make $51,017 per year and work 260 days, your daily pay rate is $196 ($51,017/260). Multiplying the daily rate by 22 paid days off, you actually make $4,312 for days you don’t work.
Health Care
Some benefits, like health care, are much less predictable. Of course, not all employers offer health care, and it is difficult to determine the value of any benefits offered. However, according to ehealthinsurance.com, our 60 year-old married individual with two kids could purchase a health care plan from Select Health with a $1,000 deductible per individual and $2,500 deductible per family for $1,243 per month or $14,916 per year. Many employers won’t cover this entire cost, but let’s assume the employer covers 60% of this cost, leading to a total health care benefit of $8,949 contributed by the employer.
Life Insurance
Life insurance, when provided by an employer, is typically term insurance and fairly cost effective. Assuming the employer provides life insurance equal to two times your salary, they would provide $102,034 of coverage. On intelliquote.com, I found that Genworth was willing to provide this level of coverage for $41 per month, or $492 per year.
Long-Term Disability
When offered, employers usually provide long-term disability coverage amounting to approximately 50% of your salary. On Mutual of Omaha’s website, I found that a long-term disability policy providing a $2,000 per month benefit (47% of salary) after a 60-day elimination policy would cost our 60 year-old employee $175 per month, or $2,100 per year.
Adding It Up
So how much are the benefits for our hypothetical [hospital] employee worth?
• FICA contributions: $3,903
• Retirement plan contributions: $1,530
• Paid time off: $4,312
• Health care: $8,949
• Life insurance: $492
• Long-term disability: $2,100
Total employer-paid benefits based on a $51,017 income: $21,290
Consequently, although your salary may be $51,017, your total compensation is $72,307, and the benefits provided by your employer represent approximately 30% of your compensation. This example is typical – the U.S. Department of Labor reports that benefits are worth 30% of an average employee’s total compensation.
Clearly, benefits can amount to a significant portion of your compensation and should be closely analyzed when choosing an employer. Even if you aren’t currently considering changing employers, knowing how much your employer pays for your benefits might help you appreciate your job at least a little bit more.
Lon Jefferis MBA CFP™
http://www.NetWorthAdvice.com
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Qualified transportation benefits
LON – Do not forget that a qualified transportation fringe is any of the following provided by the employer to an employee: (1) transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee’s residence and place of employment, (2) a transit pass, or (3) qualified parking.
Thanks.
Bernie
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Mercer: Health Benefit Cost Per Employee Will Rise By 4.6% In 2015
According to the National Survey of Employer-Sponsored Health Plans (conducted annually by Mercer):
• Employers held down growth in the average per-employee cost of health benefits to 3.9% in 2014.
• Total health benefit cost averaged $11,204 per employee in 2014.
• Without plan benefit changes, the estimated 2015 cost would rise by average of 7.1%.
• 3% of large employers moved to a private exchange in 2014.
Note: Mercer’s nationally projectable annual survey includes public and private organizations with 10 or more employees; 2,569 employers responded in 2014.
Source: Mercer
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WORKING FOR YOURSELF AND YOUR FUTURE
Self-employment can be rewarding personally and financially, but it comes with some tough challenges: long hours, an uncertain income, and a lack of structured benefits such as health insurance and retirement plans.
In a recent survey, 61% of self-employed individuals said they were anxious about saving enough for retirement, 59% were not making regular contributions to a retirement plan, and 55% were behind in their retirement savings.
Dan Timotic CFA
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PAID LEAVE
With Paid Leave, Gates Foundation Says There Can Be Too Much of a Good Thing
Instead of a year, parents will get six months, a number that researchers say avoids the pitfalls of longer leaves.
Hermine
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