With the growing trend towards outsourcing pre-tax benefits administration by even smaller companies, it is possible to make costly mistakes.

Companies use outsourcing to reduce costs by harnessing specialized providers who apply tested applications that a generalist might not be aware of or could miss.  The results often have a positive impact on the bottom-line.  However, there are times when poorly conceived outsourcing programs, particularly in the HR area, can result in added costs rather than significant savings.

Mistakes made by HR directors when outsourcing administration of pre-tax benefits like "flex" plans, Health Savings Accounts and Qualified Transportation Expense (QTE) accounts can cost companies hundreds of thousands of dollars each year. Needlessly.

"Pre-tax benefits can pay for themselves—if done right," said Tom Guiler, vice president of Benefit Resource Inc. "But HR directors, in an attempt to save money, often outsource to low-cost administrators. Common cost-saving techniques used by some administrators actually end up lowering tax savings for employers, ultimately increasing per-employee costs. Full-service plans, on the other hand, can increase tax savings for employers, offset administrative costs, and even produce a surplus."

According to Guiler, Maximizing employee participation is the key. Employers reduce payroll taxes, specifically FICA payments, on contributions employees make to pre-tax accounts. "The industry average for employee participation in 'flex'-type accounts hovers at around 15 to 20 percent annually," Guiler says. "By providing the right mix of services, employee participation can be increased to 25 to 30 percent, the average achieved by Benefit Resource. The difference represents significant tax savings for employers."

Guiler uses as an example, the average employee, setting aside $950 a year for tax-free medical expenses, saves as much as $380. If a company has 100 such employees, it will save $7,268 in FICA expenses.

Or, the average employee, setting aside $4,500 a year for tax-free day care expenses, saves as much as $1,800. If a company has 100 such employees, it will save $34,425 in FICA expenses.

HR directors should consider the following in outsourcing these and other functions:

• Customized plan design
• Educational programs
• Convenient debit card access to pre-tax accounts
• Secure, online employee statements and account management
• Full-service support that relieves HR staff of the burden of individual problem solving
• Streamlined employer administration-no more than the simple exchange of electronic files, requiring minutes each month
• Accounting and compliance support

Switching health care insurance carriers from year to year—common among cost-conscious employers—requires HR staff and employees to adapt to new procedures. HR directors can avoid such costly disruptions by outsourcing pre-tax benefits to a specialist.