McKay Hochman - Commentary

Commentary

What Is a Cafeteria Plan?
December 3, 2004
A Cafeteria Plan is a tax-qualified employee benefit under Section 125 of the Internal Revenue Code. It permits employees to select the benefits that are most relevant to their personal situation from a “menu” of cash and noncash benefits and decide how they will be paid for. Benefits commonly include allowing employees to use pretax compensation to pay employee-paid group insurance premiums, establish flexible spending accounts for medical and dependent care expense reimbursements, and make elective deferrals to 401(k) plans. McKay Hochman offers a Cafeteria Plan document. What Is A Cafeteria Plan? To attract and retain employees, employers must offer high quality benefits. One benefit is a Cafeteria Plan. A Cafeteria Plan is a tax-qualified employee benefit under Section 125 of the Internal Revenue Code. It permits employees to select their own benefits - those which are attractive or they need. Employees choose between cash and other benefits offered under the Cafeteria Plan. Such benefits include using pre-tax compensation for employee paid insurance premiums, medical expense reimbursement, and dependent care reimbursement. The Advantages Of A Cafeteria Plan The Employer pays no FICA or FUTA tax on the salary amounts that employees redirect to the Cafeteria Plan. A Cafeteria Plan can assist the employer with the ever increasing cost of health care by permitting the Employer to increase insurance deductibles, while offering employees the option of paying virtually all non-insured medical expenses with pre-tax dollars. For the employee, the Cafeteria Plan means more disposable income, since the employee's money redirected into the plan is not subject to federal, state or FICA taxes. What Is A Dependent Care Account? This account lets the employee pay dependent care expenses with pre-tax dollars to qualified caregivers (some restrictions apply). Employees can put aside up to $5,000 pre-tax dollars per family each year. What Is A Health Care Reimbursement Account? This account gives employees the opportunity to set aside some of their pre-tax earnings to pay for most non-insured, out-of-pocket health care expenses (e.g., vision, co-pays, etc.). The employee’s money is reimbursed, tax-free, as expenses are incurred (usually monthly). Most employers impose a yearly limit on the amount an employee may contribute to the plan.
The type of benefits which may be offered in a Cafeteria Plan:
•	Accident and Health Insurance
•	Dental Insurance
•	Group Term Life Insurance (with limitations)
•	Disability Insurance (tax implications on benefits)
•	Medical Expense Reimbursement
•	Dependent Care Assistance
•	Cash-In-Lieu–of-Health Insurance
•	Vision Group
•	401(k) Salary Deferrals
Who Pays For The Cafeteria Plan? Employers usually pay implementation and administrative costs, though it is legal to have employees pay these expenses. For employers who pay administrative costs, the FICA and FUTA tax savings make a significant contribution toward these costs. If they wish, employers may continue to pay some portion of the insurance premiums. However, employees’ pre-tax money pays for medical expense reimbursements and dependent care assistance. Are Any Employees Not Allowed To Participate In A Cafeteria Plan? Sole proprietors, partners in a partnership, and those who own more than 2% of a Subchapter S corporation may not participate, although their employees may. What Is Needed To Install A Cafeteria Plan? The legal requirements include adopting a plan, executing an appropriate plan document, and furnishing a Summary Plan Description with all legally required information to employees. Employers must file an IRS form 5500 filing each year, and the plan must work within the IRS antidiscrimination guidelines. Administering a Cafeteria Plan is not difficult, but you must be meticulous. By participating in the Cafeteria Plan, you can choose to administer it yourself or hire someone else to do it for you. The Cafeteria Plan is available for a fee of $1,000, and annual maintenance costs are $1,500. Why Should You Start A Cafeteria Plan? Cafeteria plans are also known as “flex spending” or “Section 125” plans. They let employees use pre-tax dollars for benefits they choose. Many employers have adopted Cafeteria Plans. Here’s why:
•	Different employees can choose different benefits - the ones best suited to their individual needs.
•	Your company saves substantial sums of money on social security (FICA) and federal unemployment (FUTA) taxes you don’t have to pay.
•	Employees enjoy an increase in disposable income, without increasing the company’s salary expense.
•	Employees appreciate being able to participate in their benefit choices.
•	Your company is better able to attract and retain good employees.
Employers feel the advantage of Cafeteria Plans far outweigh their administrative costs and responsibilities. In short, they are a cost-effective way to offer employee benefits. With the Cafeteria Plan, you can offer employee benefits you never thought possible. MHCO has resource people to help you introduce the Cafeteria Plan and enroll your employees. We can also provide all of your plan’s installation and administrative services, or advise you on how to do it in-house. Call today to learn how you can attract and retain employees through the Cafeteria Plan!
Please contact us for more information: Steve Wagoner Newkirk Products, Inc. 15 Corporate Circle Albany, NY 12203 Phone: (518) 862-7274 Fax: (518) 862-3368 Email: info@mhco.com
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