ONE OF the most underused employee benefits available is the “cafeteria” plan – which can benefit both the employer and the employee.
These plans allow workers to withhold a portion of their pre-tax salary to cover certain medical or childcare expenses. When their workers’ taxable income is reduced, it increases their take-home pay.
This in turn can benefit you as an employer as you won’t have to pay FICA or workers’ comp premiums on those dollars.
Essentially, what you are doing by offering a cafeteria plan (also known as a Section 125 plan under the Internal Revenue Service code) is using the tax code to your and your employees’ advantage. This is a great way to enhance your employee benefits package, while simultaneously boosting your margins.
Cafeteria plans have three benefits for your employees to choose from:
1. Pre-tax premium deductions.
Premium-only plans (POPs) allow your employees to withhold a portion of their pre-tax salary to pay for their portion of the premium in their qualified employer-sponsored plans.
This is a simple way reduce reduce taxable income for the employee, as well as taxable payroll for the employer.
2. Flexible spending accounts.
An FSA allows them to fund certain medical expenses on a pre-taxed basis through salary reductions to pay for out-of-pocket expenses that aren’t covered by insurance (think: deductibles, copayments, prescriptions, over-the-counter drugs and orthodontia).
Each paycheck a certain amount is withheld pre-tax and put into the FSA. Employees pay for Qualified Medical Expenses with these funds, and many plans include a debit card for point-of-purchase convenience.
U.S. workers spend more than $1,000 every year on these types of benefits so it makes sense to spend the money using pre-tax earnings. This also increases take-home pay.
3. Dependent care FSAs.
The dependent care FSA is an attractive benefit for employees who have to pay for childcare or long-term care for their parents.
Many employees don’t take advantage of this benefit and may be unaware of the significant tax savings. Employees may hold back as much as $5,000 annually of their pre-tax salary for dependent care expenses.
In addition, by paying for dependent care with pre-tax dollars, they can save about 20% to 40% on these expenses.
Qualified dependent care expenses may include, but are not limited to:
• The care of a child under the age of 13,
• Long-term care for parents,
• Care for a disabled spouse or a dependent incapable of caring for himself, and
• Summer day camps.
What you get out of it
Every dollar that goes through a Sectin 125 Plan reduces your payroll by the same amount.
That means you don’t have to pay FICA or workers’ comp premiums on that part of your workers’ salary. Pundits say that this savings can add up to as much as 20% of every dollar being passed through the plan.
Implementing a cafeteria plan can reduce the perceived impact of health insurance premium increases to employees. For example, let’s say your company’s medical premiums climb this year and the employee’s portion goes from $1,000 to $1,120.
If these additional costs are run through a POP plan, an employee in the 25% tax bracket would have an increase of just $90, rather than $120.
It’s also a great recruitment tool and an essential part of a larger employee benefits package. v