Benefit Sources & Solutions

Cafeteria Plans

Cafeteria Plans, created by Congress in 1978, are a powerful tool to help employers realize tax savings while lowering the out-of-pocket costs employees pay to participate in benefit programs. As the cost of health insurance continues to escalate at rates outpacing that of inflation, employers can take advantage of all possible methods to reduce costs, including Section 125-Cafeteria Plans, which are also referred to as Premium Only Plans, Flex Plans, Flexible Benefit Plans, Flexible Spending Accounts, Dependent Care Reimbursement Accounts and more.

A Cafeteria Plan must be established in writing. It allows employees to choose from among two or more benefits which include cash and statutory, non-taxable benefits. Partners and 5% stockholders of S-corporations are excluded from participation in these plans; and the plans must be tested for non-discrimination.

The traditional Cafeteria Plan allows employers to set a fixed benefits budget per employee and for the entire company. The employer provides dollars or spending credits to employees. Employees are allowed to choose from a cafeteria of benefits. Each benefit has a corresponding cost. Once the employer-provided credits or dollars are used up, the employee can elect to have dollars from regular pay diverted to fund the cost of benefits on a pre-tax basis under Section 125.

Three general types of Cafeteria Plans include:

The Premium Only Plan. This plan allows employers to deduct the employees’ share of benefit costs on a pre-tax basis. In many states an employer reduces state and federal wages. New Jersey does not recognize cafeteria plans, so it only reduces federal wages, thus saving federal taxation on the contribution. Further, the employer saves the cost of FICA and Medicare on the employees’ contributions.
Flexible Spending Accounts allow employees to defer part of their pay (up to $2,500 annually) to pay for specified non-reimbursed expenses. These expenses can include deductibles, coinsurance, copayments as well as uninsured services such as dental care and vision care services.
The Dependent Care account can allow employees under certain circumstances to defer up to $5,000 annually to pay for qualified daycare for dependents. Employees must recognize that amounts deferred from their pay that are not used during the plan year are forfeited. This is known as “use it or lose it.”

Before implementing a Cafeteria Plan, Benefit Sources & Solutions can conduct a survey to determine the employees’ level of interest in the plans. Often times, the tax savings associated with these plans can fully fund the cost of administration.