Why offer a cafeteria plan?

By Higginbotham on May 18 , 2016


When it comes to attracting and hiring the best talent in today’s competitive economy, benefits packages can be the great equalizer. But compensation packages are eating up more and more of employers’ bottom lines, not to mention the increasing compliance and legal headaches. For employers looking for ways to squeeze the most out of their benefits packages without breaking the bank, cafeteria plans may prove to be a smart option.

Do you offer a cafeteria plan? There are some good reasons you should.

Also known as “Section 125 Plans,” these plans allow an employee to contribute a certain amount of gross income to a designated account before taxes are calculated. This account can then be used to reimburse the employee for qualified expenses such as insurance premiums, medical care or dependent care throughout the plan year. There are a few options:

  • Premium Only Plan (POP). POPs are relatively simple, straightforward plans that are easy to put in place and administer. Employers must have at least a POP in place before they are allowed to deduct an employee's portion of the company-sponsored premium directly from the employee's paycheck before taxes.
  • Flexible Spending Account (FSA). In a FSA, employees can set aside a pre-established amount of money on a pre-tax basis per plan year. The employee can then use the funds in the FSA to pay for eligible medical, dependent care or transportation expenses.
  • Dependent Care FSA. A dependent care assistance plan (DCAP), also referred to as a “dependent care flexible spending account” (FSA), is an employee benefit plan that helps employees pay for the care of a qualifying dependent. The qualifying dependent must live with the employee and must be 12 years old or younger. A person age 13 or older qualifies if that person is physically or mentally incapable of self-care. This type of FSA allows an employee to be reimbursed for eligible dependent care expenses so that the employee and his or her spouse may work, look for work or attend school full time.
  • Health Savings Account (HSA). These are tax favored accounts that can be established by and contributed to or on behalf of eligible individuals covered by certain high deductible health plans (HDHPs) to pay for certain medical expenses of eligible individuals and their spouses and/or tax dependents. Employers can make pre-tax contributions to their employees’ HSAs if they have a cafeteria plan in place that provides for HSA contributions.

Why are cafeteria plans so popular with both employers and employees? They’re a tax-saving win-win.

  • For employees, these plans offer the ability to pay for certain qualified expenses such as health insurance premiums, medical care, dependent care and transportation expenses on a pre-tax basis. They contribute a certain amount into the FSA or HSA each year, and this election is automatically deducted from their paycheck. These pre-tax contributions aren’t subject to federal, state or Social Security taxes. So in essence, these plans allow employees to reduce their total taxable income and increase their take-home income.
  • For employers, all contributions made to any reimbursement plan are non-taxable, which can mean a significant savings in federal, FICA, FUTA, workers’ compensation insurance premiums and some state income taxes. These tax savings can sharply reduce or altogether eliminate the costs associated with offering the plan. And they’re a boost for employees who basically get a raise with no additional costs to you. And the more participants, the greater the tax savings for you. So, you might want to consider contributing to each employee’s FSA account to promote participation in the plan.

A stronger benefit program

If you’re not offering one of these plans, you could be missing out on an easy opportunity to enhance your compensation package with little to no added cost. And that can help you attract and retain the best talent, increase employee satisfaction, improve productivity, even decrease hiring and training costs by lowering turnover and increasing company loyalty. For more information on incorporating a tax-saving cafeteria plan into your benefits offering, talk to the employee benefits experts at Higginbotham Insurance.

Related: Three benefits your employees wish you offered


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