 |
Flex Card |
|
|
Forms |
|
|
General FAQs |
|
|
Additional Information |
|
|
Services |
Cafeteria Plan Administration
Created
in 1978, Section 125 of the tax code implemented flexible employee
benefit plans. Commonly called “Cafeteria plans”, these plans allow
employees to pick and choose among benefits on a menu selected by their
employer.
Initially only large corporations such as the Fortune 500 companies
installed these plans due to the complexity of interpreting the tax
codes and administering the plans. Today, millions of workers are
covered on cafeteria plans with medium and small employers and they are
enjoying the benefits afforded by plan participation.
This plan allows employees to take their contributions as deducted from
their paycheck BEFORE all taxes. This reduces taxable income thus
reducing Federal Income and Social Security taxes. The immediate result
is that the employee enjoys an increase in his spendable income.
The employer benefits too. The matching Social Security tax contribution
is waived on all pre-tax elections going through the plan. The bottom
line is that both the employee AND employer gain significantly with a
cafeteria plan.
An employer will establish a menu of benefits and determine whether to
offer a premium only plan (POP) or a full plan with flexible
reimbursement accounts. Some employers are now moving to the true
cafeteria plan scenario where they will offer a certain dollar amount
each month to eligible employees to purchase any benefit offered by the
employer, including employee only health/HMO coverage which has
historically been employer paid. This controls an employer’s cost for
benefits and any elections by the employee over the contributed amount
by the employer is simply paid by the employee with pre-tax salary
reduction.
As with any plan governed by the various tax codes and the IRS,
employers must exercise caution in ensuring the plan is setup and
managed in compliance with these guidelines. Plan design issues such as
benefits offered, entry and eligibility, plan documents, medical
reimbursement account structure, preparation of the form 5500 and other
issues must be addressed.
