Cafeteria Section 125 Flexible Benefit Plans

By: Paul M. League, QFP, CFP® (California Insurance License # 0610019)
T:  1.800.482-5347 · F: 1.310.861.8466
 

The 3 Components of a Full Section 125 Plan Are: 

• “POP”-Premium Only Plan, where any Health, Dental, Vision, & Group Term Life (up to $50,000) premiums, paid by employees, are moved to pre-tax.

• Dependent/Child Care costs (i.e., Day Care, etc.) to pre-tax.

• Medical Expense Reimbursements to pre-tax.

Advantages to the Employer Include: a reduction in Employee Payroll Taxes (SS Tax at 7.65 plus a reduction in Workers Compensation premiums usually equaling $1 per 100 of payroll or ranging from 1% - 13% depending on the Federal Taxes & industry risk factor ratings).  Advantages to the EmployEES include:  a reduction in Federal Taxes (15%-34%) and State Taxes (2-10%).  These advantages are achieved by a reduction in gross pay achieved by taking legally allowed expenses and paying for them with Pre-Tax Dollars rather than After-Tax Dollars.  The resulting reduction in gross pay gives Employees a greater Net Spendable Income (savings of anywhere from 10-40%) while at the same time delivering the Employer a savings of approximately 10% or more in taxes.  The result is that the Employer can offer a Plan without any net costs for set-up and administration.

There are virtually no negatives to establishing such a Plan.  The administration costs are covered for the Employer through the tax benefits noted above, and the only other issue for the Employer is that there needs to be a time commitment allotted so that the employees can be informed and educated regarding the Plan and its benefits.  Remember, the greater number of participating Employees the greater the Employers’ and Employees’ tax savings; therefore your fullest involvement in communicating these benefits to the Employees yields the best overall result.

One potential drawback for the Employees is that the reduction to payroll results in lower Social Security taxes thereby creating a somewhat reduced Social Security Survivor & Retirement benefit in retirement years.  A solution to this is to allow the Plan participants the option of buying, with a portion of their tax savings generated by the plan, a Universal Life policy (premiums are non deductible), which will allow for the replacement of Survivor Benefits as well as attractive Tax Deferred Savings via policy cash value accumulations thereby creating additional Retirement Benefits.  In fact, with the growing lack of confidence in the Social Security system Employees look upon such an approach very favorably.  Again, meetings are required to communicate these advantages to your Employees.

The attached sheets illustrate the advantages noted above.  You will also see that there are three Plan versions that you may adopt.  The most simple is a “POP”, or Premium Only Plan, where the only reduction to the Employees gross salary is for their share of the premiums on:  Health, Dental, Vision, and Group Term Life (up to 50k).  The next would be reductions for Dependent Care Assistance, and the third would be reductions for Medical Reimbursements/Flexible Spending Accounts.  The most complete plan would allow for all three categories and would thereby save the Employer & Employee the most in taxes.  The participation by Employees will vary on each of these plans based usually on their understanding of the benefits and their personal needs in each benefit area.  

 

Contact Us Today!  Phone:  1.800.482.5347 / www.LeagueFinancial.com / Info@LeagueFinancial.com

 
I.  Premium Redirection Plans (IRC Section 105/106 & Section 79 Group Term Life):

These plans are often referred to as “POP” or Premium Only Plans and allow Employee salary reductions on Employee premium contributions for Medical, Dental, Vision & LTD Insurance.  Salary Continuation Plans may also be included, and under Section 79 the premium costs for $50,000 of Employee Group Term Life and $2,000 Spousal Term Life coverage's.

II.  Dependent Care Assistance Plans (IRC Section 129):

These plans permit Employee salary reductions for Child Day Care, Pre-School costs, Baby Sitting, and Elderly Dependent Care.  Note that when this election is made by an Employee that they will lose their Dependent tax credit on their tax return;  however, most prefer the alternative tax outcome.  The total annual salary reduction is $5,000 for all eligible dependents for those filing a joint or single return, $2,500 for a married person filing separate.  You can anticipate a 5-15% participation rate that can be increased by Employee meetings.

III.  Flexible Spending Accounts (IRC Section 105/106 & 213):

These plans allow for Employee salary reductions based upon projected expenses for:  Medical Reimbursements (i.e. non-covered and/or limited or capped Employer Group benefits such as expenses to meet Deductibles, Co-Pays, Co-Insurance, Eye & Vision, Mental & Psychological, Chiropractic & Acupuncture expenses, etc) for Employees and their Dependents.

NOTE:  Dependent Care Assistance Plans & Flexible Spending Account Plans are subject to the “Use it or Lose it Rule” meaning that Employee elections that are unused by them during the plan year are surrendered to the Employer sponsoring the Plan.  These monies can not be paid out by the Employer as a discretionary bonus but may be used by the Employer in any other manner.

The law creates an Employer risk element on Flexible Spending Accounts to offset the Employees’ risk (the risk created when the Employees elect their expense reductions and may leave having incurred them prior to their salary being reduced to fully cover the liability exposure of those elections); namely, forfeitures.  The Employer becomes liable for Employees salary elections’ for the entire Plan year even on yet unearned income.  The area where this can become a problem is with terminated Employees.  Employers have to pay monies on behalf of the terminated Employees based on their previously planned elections, even after their termination through the end of the plan year.  The Employer forfeits these advance payments.  Limiting the maximum amount allowable for salary reduction elections under the Flexible Spending Account Plan can minimize the impact of this.

 

Contact Us Today!  Phone:  1.800.482.5347 / www.LeagueFinancial.com / Info@LeagueFinancial.com