Employee benefits have come a long way. From the types of benefits available to the way that employees engage with them, they continue to increase employee health and work-life balance.
To keep up, care benefit providers are offering up different, creative ways for companies to make their benefits contributions to employees. There are vouchers, group prices, discounts, reimbursement accounts, subsidies, on-site benefits, and others. The list goes on.
The two most common ways to contribute employee care benefits are through care subsidies and reimbursements. Although there are pros and cons to both, there are unique perks to using subsidies.
Subsidies vs. Reimbursements: What's the Difference?
Care benefit subsidies and reimbursements are both benefits paid to the employee by their employer. This means that the employer takes on the cost of the benefit. Care benefits can either be paid by the employer directly to the care provider in the form of a subsidy or employers can contribute to a reimbursement account.
Employer-Provided Subsidies
A subsidy is when an employer decides to pay for an employee’s benefits. In the case of a care benefit, subsidies can either be paid directly to the employee, or the employer can make payments to a care provider.
Care Benefit Reimbursements
Through benefit reimbursements, the employee initially pays for care expenses out-of-pocket. Within a certain amount of time, they’ll need to submit the required paperwork to receive their reimbursement from the company. Required paperwork usually includes an itemized receipt for the service and other documents to describe their expenses.
Tax Implications and Pre-tax Deductions
Tax Benefits of Care Benefits
At the federal level, there are generally two tax benefits programs for employees in the Internal Revenue Code (IRC): the child and dependent care tax credit, and employer-provided Dependent Care Flexible Spending Accounts (DCFSA). Employees benefit from each of these by either having their taxes reduced, or their taxable income reduced.
Pre-Tax Deductions Using DCFSAs
Under federal law, child and dependent care benefits can be deducted from an employee’s pay on a pre-tax basis using Dependent Care FSAs, or DCFSAs. DCFSAs are used by working parents and families with dependent adults.
DCFSA funds can be used to pay for the care of:
- children under the age of 13, and
- dependents who are 13 years old and above who are incapable of self-care.
Many companies offering benefits for family care choose DCFSAs because of the tax benefits, and also because they can be funded by employees, employers, or both. Most importantly, contributions are made to DCFSAs before taxes, which saves employees and employers money by reducing the employee’s taxable income.
The Perks of Using Subsidies
The difference between subsidies and reimbursements is really only a matter of how or when employees receive employer benefit contributions. However, there are key practical benefits to structuring your employee benefits package so that employees receive subsidies.
Subsidies Increase Benefit Use
Subsidies prevent out-of-pocket expenses.
Employees are more likely to use their benefits when they don’t have to pay out of pocket first and wait for their reimbursement. Paying out of pocket can be particularly discouraging when the benefit cost is not insignificant, which is often the case with dependent and childcare reimbursements.
A dependent care or backup care reimbursement can easily exceed $100. For most employees, this isn’t insignificant, and for some, spending this amount of money out-of-pocket won’t even be affordable. Knowing this, employees may opt out.
Subsidies reduce uncertainty for employees.
Reimbursement account, employees might worry about how much of their benefits they’re using or not using because they can’t see their balance in real-time. Through subsidies, employees will know how much they have left as soon as the benefit is used.
Some care benefits must be used during the tax year in which they were earned. With subsidies, employees are less likely to worry about losing money at the end of the year because they’ll know their benefit balance.
Streamlined Record Keeping
Companies that use reimbursements often have to wait for employees to provide the paperwork necessary to receive the reimbursement. If employees lose a receipt or forget to submit paperwork, they may lose their opportunity for reimbursement.
Through a subsidy, which could be paid directly to a care provider, receipts and other paperwork will already be provided to the company. Streamlining the record keeping process will ease compliance.
Benefit Overage
Tracking benefits use has historically been challenging for employees. Whether it’s limited access to employee portals or confusing benefits programs, employees often aren’t aware of their care benefit balances. This is common with reimbursement accounts.
If an employee uses their care benefit regularly, reimbursements accounts can lead them to accidentally spend more out of pocket than what they have left. Through subsidies, this won’t happen.
Choosing the Right Care Benefits Provider
Today, employee benefits services are available to help companies with a wide variety of care benefit plans for dependent care and childcare, and also backup care. If you’re in the market for a new benefits solution, consider making sure that your provider has the following capabilities:
- Direct pay. With a direct payment option, employees can pay for services using their benefits immediately. Advanced benefits solutions will simultaneously collect the paperwork that would typically be needed for reimbursement.
- Real-time balance from home. Find a provider who can show your employees their balance in real-time. A user-friendly portal that shows employees how much they’ve used and how much they have left will encourage use.
- Upload your own provider. Employees will likely want to use caretakers who they already know, especially if they’d like to use their benefits for home care services. Upload your own provider features are also often more affordable.
- Mobile. As with many other industries, care providers are going mobile, creating phone apps that employees can use to manage their benefits.
- Compliance assistance. Compliance with state and federal law is extremely important for care benefit programs. Find a care provider that will partner with you on state and federal compliance efforts.
Helpr is Here for You
At Helpr, we make care benefits easy. Through our employer partnerships, we’ve helped companies launch global care benefits programs spanning from DCFSA benefits management to subsidized childcare programs, to backup care benefits.
