Navigating the world of pre-tax benefits can sometimes feel like deciphering a complex code. With terms like “substantiation” and “HRA” it’s no wonder many find themselves scratching their heads in confusion. Yet, understanding these terms is key to unlocking the full potential of pre-tax benefits.
Whether you’re a seasoned benefits administrator or new to the world of pre-tax benefits, this exploration will provide clarity on what these terms truly mean and how they can benefit both businesses and employees alike.
PRE-TAX BENEFITS
If you haven’t heard of these before, they can seem odd. Pre-tax benefits are, in effect, a way to decrease your income before taxes so you pay less in taxes. That’s their chief purpose. They allow you to set aside money from your paycheck now for specific purposes so you don’t lose as much to taxes later.
Of note: pre-tax benefits are only available if your employer offers them. There are generally four different types of pre-tax benefits, (flexible spending accounts, health savings accounts, and commuter benefit accounts). Your employer may offer one or all.
ELIGIBLE EXPENSES
A purchase, service, or item that is allowed to be purchased with pre-tax funds per IRS Code Section 213(d).
RECEIPT
A credit card statement usually doesn’t meet these requirements. An itemized receipt from the merchant or provider is required. You may have to ask your care provider for an itemized receipt. If the expense went through your insurance, an Explanation of Benefits (EOB) from your insurance company provides the same detailed information.
SUBSTANTIATION
After swiping the card and paying for an eligible service, you may receive a notice that you need to provide proof the purchase was eligible. To complete a substantiation request, you will need your itemized receipt or an Explanation of Benefits.
CLAIM
A claim is asking to be reimbursed for the purchase through your pre-tax account. You submit a claim for reimbursement in order to pay yourself back from your pre-tax account.
OPEN ENROLLMENT
The period of time during which employees may sign up for benefits like health insurance and pre-tax benefits.
ELECTION
There are a few ways to define this. Generally, it is regarded as the dollar amount that is selected to be set aside in your account(s) during the year on a pre-tax basis. Each reimbursement account you open requires you to “set” a new election.
When you set an election with a Flexible Spending Account, the amount is locked in for the year, except if you have a qualifying life event. You can also set up an election for your account(s) under a Commuter Benefit Plan. Commuter Benefit elections can generally be changed each month, if needed. Finally, an election for a Health Savings Account (HSA) usually offers some flexibility and can be changed throughout the year. How often an HSA election can be changed will depend on your employer’s rules.
Fun fact: There is no such thing as an Health Reimbursement Account election. We explore this a little more in the HRA definition.
DEPENDENT CARE ACCOUNT
Also known as a Daycare Account, a Dependent Care Account allows you to set an election that is used to pay for eligible childcare services. The name “Dependent Care” can be a little confusing. It makes it sound like the funds in the account are an extra allowance to pay for kids’ medical expenses.
However, that is not what this account is used for. It is only for eligible care expenses. Thankfully, kids’ medical expenses are covered under a Medical FSA.
DEPOSIT
The act of an election being deducted from an employee’s paycheck and being put towards a pre-tax account.
HRA
A Health Reimbursement Arrangement.
An HRA is free money from your employer. Your employer determines many of the rules regarding what expenses are eligible (per IRS guidelines), when benefits are paid, and when claims must be submitted.
That’s it. You’re finished! You now know the definitions of 10 of the most common pre-tax terms.
