Section 125 - Flexible Benefit Plans
With the costs of providing employee benefits and health related benefits continuing to escalate, employers can no longer absorb the total cost of providing employee benefits. Since employees are usually unaware of the high cost of employer-paid benefits, they don't typically count the cost as part of their compensation. In The Tax Reform Act of 1979, guidelines were set for Cafeteria Plans that allow employees the use of pre-tax dollars for certain employee benefits.
Premium Only Plans
The simplest form of a Cafeteria Plan is a POP, short for Premium-Only Plan. Examples of employee-paid premiums that are eligible under a POP are:
| Health (Major Medical) |
Dental |
• Vision |
• Prescription |
• Disability |
• Group Term Life ($50,000 max) |
Advantages of a POP Plan
- Employees save an average of 30% in income taxes on all eligible contributions
- The company saves approximately 10% on FICA and other reduced payroll taxes on the total of all employee contributions
- A POP enhances the current benefit program without changing existing benefits
- A POP allows control over rising health care costs to the company
- A POP is simple and inexpensive to install and maintain.
Flexible Spending Accounts
A Flexible Spending Account or FSA is an individually allocated reserve account that is available to reimburse employees for certain tax-qualified expenses that are not reimbursed under their company sponsored benefit plan. FSAs can be an option under a broader flexible program. There is typically a maximum limit established by the plan.
Types of Spending Accounts
|
Under this type of account, the employee pre-determines any out-of-pocket health care expenses anticipated for the plan year. This total annual amount is deducted in equal installments from his/her paycheck pre-tax. As the employee incurs expenses, he/she will submit a voucher for reimbursement. |
Dependent/Child Care Account |
Under this type of account, an employee is reimbursed for expenses incurred for the care of a dependent child under the age of 13 years, or of an incapacitated dependent adult. There is a $5000 annual limit that applies to dependent care benefits. The maximum is $2,500 for married filing separately. Again, the amount set aside by an employee into a Dependent Care FSA is done so pre-tax. Thus, such dollars are not subject to FICA taxes. |
* As a tax-qualified benefit program, there are certain legal requirements that have to be met in order to comply with the tax laws including Plan Documents, Summary of Plan Description, Annual Discrimination and Compliance Tests, and Annual Form 5500 filing.
