Employee Benefit Plans
Employee Benefit Plans (Cafeteria Plans) Also called flexible benefit plans, cafeteria plans allow participating employees to choose among two or more benefits consisting of cash and qualified benefits. [IRC Sec. 125(d)(1)(B)]. There is no need to change current benefit programs. If the employer is unable to pay for fringe benefits, the employee can enter into a salary-reduction agreement with the employer. The employer then uses these funds to pay for the employee's benefits. This allows the employee to pay for his or her own benefits with pre-tax dollars. Employee Benefits Some of the benefits that can be enjoyed by employees include the following: Lower FICA and income tax withholding due to lower gross pay Ability to select those benefits most needed Opportunity to refuse benefits already provided by a spouse's employer Option of redirecting tax savings to retirement meet retirement needs; e.g., 401(k) plan, life insurance, etc. Potential qualification for the earned income credit due to lower gross income Employer Benefits Some of the benefits that can be enjoyed by employers include the following: Lower payroll taxes (FICA, FUTA and sometimes worker's compensation insurance) due to lower gross pay Sharing cost of benefits with employee, if desired Help in retaining key employees Improved employee morale due to show of employer concern Potential reduction in fringe benefit costs Qualified Benefits In addition to those benefits listed above, some qualified benefits may also be included: Employee paid medical insurance premiums Group term life insurance Dependent care assistance Excluded Benefits Scholarships or fellowships described in IRC Sec. 117 Educational assistance programs described in IRC Sec. 127 Miscellaneous fringe benefits (including transportation and parking) described in IRC Sec. 132 1 Nonqualified deferred compensation plans Qualified retirement plans, except cash or deferred arrangements under IRC Sec. 401 (k) Long-term care benefits described in IRC Sec. 4980C and IRC Sec. 7702B Contributions to medical savings accounts described in IRC Sec. 220 Plan Requirements The plan must be written and include only employees.2  The plan should include the following items: Description of benefits and coverage periods Eligibility rules for participation How benefit elections are to be made How employer contributions are to be made; i.e., employer funds or salary reduction Maximum amount of employer contributions Plan year 3 Annual filing of an information return (Form 5500 and Schedule F) with IRS Flexible Spending Accounts Flexible spending accounts (FSA) are a type of cafeteria plan commonly used by many employers. In an FSA, participating employees generally elect to have their salary reduced each month. The employer then uses these funds to pay for certain benefits with pretax dollars. There are two types of FSAs. 1. Medical expenses not otherwise covered 2. Dependent care expenses for both children and parents Tax Benefits The payment of the benefit is tax deductible for the employer and is not considered additional income to the employee. As these dollars are not considered to be wages, they are not subject to either FICA or FUTA tax. Health Benefits If an FSA provides health benefits (like medical or dental expenses) to participants, it must be ready to pay the full year's benefits to an employee who qualifies for the benefit. For example, if the employee has contributed for only one or two months at the time of the claim, the employer must pay for the entire expense up to the amount projected for the full year of contributions by the employee. If the employee then terminates employment before the amounts are deducted from his or her paycheck, the employer must suffer the loss. 1 The Transportation Equity Act of 1998 allows pretax contributions for qualifying transit vouchers or parking, but these cannot be part of a cafeteria plan. 2 Sole proprietors and partners or subchapter S shareholders who own 296 or more of the business may not participate. See proposed Regulation Sec. 1.125 1, A-3. Continue for more information: Employee Benefit Plans and Discrimination