How You Can Benefit from a Cafeteria Benefit Plan

  Cafeteria Plans are benefit plans that fall under the Internal Revenue Code in Section 125. The plan is set up by employers to help employees have benefits on a pretax basis. Employees can have qualified benefits that allow them to make choices about where their money goes for insurance and medical insurance purposes. These pretax benefits can help employees and employers save money.

   Qualified benefits do not defer or delay compensation for work. These benefits can include health savings accounts, group term insurance, dependent care assistance, adoption assistance, and accident and health benefits. They do not include long-term care assistance or Archer medical savings accounts.

   All plans must be written and specific. They must include eligibility rules and include both taxable and nontaxable benefits. If a plan has only taxable benefits, it is not in compliance with Section 125 of the IRS Code and will be treated accordingly. By offering both taxable and nontaxable benefits, the employer meets the criteria for establishing a Section 125 plan. The plans will cover employees and their families and may cover retirees and their spouses.

   Why is the plan beneficial to employees? When employees deduct part of their income to purchase insurance plans, that amount is deducted from their gross wage before taxes are applied. Let’s use a simple example:

After Tax

Employee gross wage is $1,000

Taxes                                     250

After tax income                   750

Insurance                              100

Spendable income             $650

Pre Tax

Employee gross wage is $1,000

Insurance                              100

Taxable income                    900

Taxes                                     225

Spendable income              $670

   Here you can see the employee gains $25 in take-home pay using a cafeteria plan. The employer can save money as well. Using the same figures above, the employer pays 7.65% in FICA taxes, 15% in Federal taxes, and 2.5% in State taxes. Using the cafeteria plan, the employer would save $7.65 on this employee per pay check. Multiplying tax savings by every employee can add up to significant savings for employers. The more employees an organization has, the greater the savings. With these plans, small business owners can save on each employee.

   There are businesses that will set up and administer your S125 plan for fees. There are other options, however. Some companies will set up the plan and help you for fee. Another feature to look for is whether a plan is friendly or unfriendly. Some plans that are set in place have no provisions for other products or companies, thereby reducing the choices available to employers and employees. Look for a plan that is friendly and will help you have the greatest choices that will benefit you and your employees.

   Why does this matter? Let’s say you set up a plan with a company that is not friendly. You initially get your major medical insurance with a company, but after a year, you determine you can get better coverage or rates from another insurance company. Your plan does not allow you to change your medical insurance. For example, if you set up a cafeteria plan under Aflac, you have the options to make changes in your major medical provider and other benefits. Aflac is known as a “friendly” system for that reason.

   For more information, you can visit the IRS website at www.irs.gov for the rule and regulations regarding Section 125 Cafeteria Plans. The information for this article came directly from that site. If you want more information, you can also contact your accountant, a CPA, your financial planner, or even an Aflac agent.

Have a terrific day!

Patricia