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.
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AVAILABLE PLAN VERSIONS FOR A CAFETERIA PLAN
By: Paul M. League, QFP, CFP® - California Insurance License # 0610019
T: 1.800.482-5347 · F: 1.310.861.8466
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.
SAMPLE - EMPLOYEE SAVINGS (2010)
USING A FLEXIBLE BENEFIT / CAFETERIA SECTION 125 PLAN
By: Paul M. League, QFP, CFP® - California Insurance License # 0610019
T: 1.800.482-5347 · F: 1.310.861.8466
| |
WITHOUT
FLEXIBLE BENEFIT PLAN |
|
WITH
FLEXIBLE SPENDING PLAN (e.g. moving eligible expenses to pre-tax) |
|
Taxable Salary |
$2,000 |
Salary |
$2,000 |
|
Income Tax (28%) |
- 560 |
Salary Redirection
to Flexible Benefit Plan |
- 780 |
|
Social Security |
- 153 |
Taxable Salary |
$1,220 |
|
After –Tax Income |
1,287 |
Income Tax (28%) |
- 340 |
Health Insurance Premium
(dependent coverage) |
- 330 |
Social Security (7.65%) |
- 93 |
Un-reimbursed Medical
Expenses |
- 50 |
(Reduced Due To Moving Eligible
Expenses to Pre-Tax-Vs-After-Tax) |
n/a |
|
Child Care Costs |
- 400 |
|
n/a |
|
Net Spendable Income |
$ 507 |
Net Spendable Income |
$ 787 |
Monthly Difference = + $280 Annual Difference = + $3,360
NOTE
INCREASE TO AN EMPLOYEES NET SPENDABLE INCOME BY USING THE
CAFETERIA SECTION 125-FLEXIBLE BENEFIT PLAN WHICH ALLOWS YOU TO
MOVE CERTAIN ELIGIBLE EXPENSES FROM AFTER-TAX TO PRE-TAX!
[Assumptions of 28% Income Tax Rate; the 2010 7.65% tax rate is the combined
rate for Social Security and Medicare. The Social Security portion (OASDI) is
6.20% on earnings up to the applicable taxable maximum amount ($106,800 for 2009
on SS as Medicare HI has no limit - the Medicare portion (HI) is 1.45% on all
earnings)].
Disclaimer: The material discussed
herein
is meant for general illustration or informational purposes only and is
not to be construed as investment advice. Although the information has been gathered from sources believed to
be reliable, it is not guaranteed. Please note that individual situations
can vary; therefore, the information contained herein should be relied upon only when
coordinated with individual professional advice. We are not licensed for
and therefore do not provide tax or legal advice.
About
the Author: Paul M.
League, QFP, CFP® is the Founding Principal of both League Financial & Insurance
Services (www.LeagueFinancial.com) & League Financial Services (www.LeagueFS.com),
which are privately held companies
located in Palm Desert, CA.
Paul and his companies specialize in assisting clients to
create, expand & preserve assets. Contact Information: Paul M. League, QFP, CFP®, P.O. Box
11800, Palm Desert, CA 92255-1800 · 800.482.5347 ·
Info@LeagueFinancial.com.
©Paul M. League. All Rights Reserved.
