Making Most of the Benefits Buffet: Cafeteria Plans
It may be a while before we return to the world of buffets and cafeteria plans, but employer cafeteria plans are still alive and well! There are two different types of cafeteria plans that work based on pre-tax accounts versus reimbursements and offer different kinds of benefits depending on what type your employer has. Cafeteria plans are a great way to choose your benefits according to your personal life goals! As a business owner, offering employees benefits can attract great talent as well as save you money on your payroll taxes!
Section 125 Cafeteria Plan
As an Employee
The Section 125 plan is the most common plan especially for health insurance.
In a traditional Section 125 plan, the employer pays part of the employee premiums. It works by allowing you to contribute part of your pre-tax income into an “account”. This account can then be used toward:
Health Flexible Spending Accounts (FSA)s: Allows you to pay for out-of-pocket medical expenses on a pre-tax basis
Health Savings Account (HSA): Similar to an FSA, but has an added level of mobility for employees rather than being tied to an employer
Dependent Care Assistance Plan (DCAP): Allows employees to set aside up to $5,000 of their pre-tax income to pay for dependent care like child care
As a Business Owner
There are many advantages of implementing a cafeteria plan for your employees, For one, your payroll taxes are reduced, making it even cheaper to implement a cafeteria program. The more attractive your benefits are, the more talent you’ll potentially attract and retain! Should an employee not use up their FSA funds or leave the company, the funds stay with the employer. There are also a few disadvantages, too. For example, Section 125 plans can be complicated to set up and require stringent documentation. In addition, some employees do not like being contractually obligated to certain benefits for up to a year after they make their decisions.
Section 105 Cafeteria Plan
As an Employee
Section 105 plans work a little differently than 125 plans. Namely, Section 105 benefits are tax-free reimbursements for individual health insurance expenses. Here are a few of the most common types of plans:
Self-Funded (Self-Insured) Health Plans: The employer self-funds the health benefits rather than working through an insurance company and paying premiums. However, there is an additional risk should more claims than originally expected need to be paid.
Health Reimbursement Accounts (HRAs): A reimbursement program where the employer partners with an insurance company to implement.
Health Reimbursement Plans (HRPS); A stand-alone reimbursement program where the employer manages the reimbursements directly without an insurance company.
As an Employer
Offering employee benefits as part of a Section 105 Plan is more flexible because it allows the employers to decide how much they’ll contribute, and then the employees can pay for what they need. The employer also owns the funds, so any unused funds due to employees not using them or leaving the company stay with the employer. FICA and FUTA taxes are reduced for the employer, too! This plan can be treated like a business expense account that is tax-deductible and tax-free to employees. Similarly to the Section 125 plan, it is paramount that detailed documentation is kept.
Everyone loves a company with generous benefits, and it can be a wonderful core competency to have as an employer! As an employee, it’s important to read the fine print, ask questions, and fully understand the details of what benefits your employer is offering you.
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