About Cafeteria Plans
What is a Cafeteria Plan?
A Cafeteria Plan (authorized under IRS Code section 125) is a written benefit plan maintained by a company for the benefit of its employees. As a participating employer, you too can receive valuable tax benefits. It works by allowing your employees to pay their portion of certain nontaxable benefits with pre-tax dollars through salary reduction rather than with after-tax dollars. In other words, as they save on Income and Social Security Taxes you too save the Payroll Taxes.
What benefits are allowed under a Cafeteria Plan?
A Cafeteria Plan can offer the following types of benefits:- Insurance premium benefits
- Health Care FSA
- Dependent Care Assistance Plan
- Health Premium Reimbursement Account
- Supplemental Insurance Benefits
How will a Cafeteria Plan benefit me?
As an employer, a Cafeteria Plan can benefit you in many ways. We've already mentioned the Payroll Tax benefit, but it also serves as an employee retention tool as well as a good recruiting tool. It cushions the blow of rising premium costs and increases your employee's awareness of each benefit cost.
How will a Cafeteria Plan benefit my employees?
Let's look at an example of how an employee could save taxes by participating in a cafeteria plan. Here's the employee's situation:
- Salary: $2,500 a month
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Withholding: 20% for federal withholding, 7.65% for Social Security and 5% for State. For a total tax bracket of 32.65%.
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Before participation in a cafeteria plan, employee paid the following:
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Monthly premium for health insurance: $348
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Out-of-pocket medical expenses: Monthly average of $100
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Day Care Expenses: $200 a month
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The employee decided to pay for the premiums through the cafeteria plan, put $100 a month in a Health Care FSA and $200 a month into the Dependent Care Expense Plan. Thus the employee had a total deduction of $648 per month.
To compute the tax savings first we multiply the monthly deduction by 12 to obtain an annual deduction of $7,776 and then we use the following equation.
Annual Deduction $7,776 (= $648 x 12 months)
Combined Tax Bracket x 38.5%
$2,538 Actual Tax Savings
In this example the employee saved $2538 by participating in the Section 125 plan. Without going into great detail, the employer, because of the employee's participation, would save approximately $500 in payroll taxes.
Can my employees change their elections later?
The elections cannot be changed during the Plan Year unless one of the following events occurs:
- Changes
in Status
- Change in marital status
- Change in the number of dependents
- Change in employment status
- Dependent's satisfying or ceasing to satisfy dependent eligibility requirements
- Significant Cost Changes
- Significant Curtailment of Coverage
- Addition or Improvement of Benefit Package Option
- Change in Coverage of Spouse or Dependent under Another Employer Plan
- Loss of other health coverage
- FMLA Leave
- COBRA qualifying event
- Judgment, decree, or order
- Entitlement to Medicare or Medicaid
The changes that may be made depend on the event and the benefit.
How do I get started?
Contact Employer Concepts for more information on how you can get started on your company's Section 125 Cafeteria Plan.
The small print
Securities Offered Through Mutual Service Corporation, Member NASD & SIPC
This is not an offer to sell securities, which may be done only after proper delivery of a prospectus and client suitability is reviewed and determined.
Information relating to securities is intended for use by individuals residing in CA only.
