Cafeteria Plans

Section 125 of the Internal Revenue Code allows tax savings for employers and employees. These Section 125 plans, often called "cafeteria" or "flex" plans are one of the few employee benefits that offer advantages to both employers and employees. There are variations of Cafeteria Plans such as:

Premium Only Plan (POP)

The POP is the most common of all cafeteria plans. It is most often used in conjunction with the other cafeteria plan types (e.g., FSA). In a POP, the employee's portion of group health and other premiums is payroll deducted on a pre-tax basis, resulting in lower employee and employer taxes.

Flexible Spending Accounts (FSA)

The next phase of Cafeteria Plans involves Flexible Spending Accounts (FSAs.) These accounts offer greater tax savings for the employer and employee. FSA's also help to fill coverage gaps between health plans and out-of-pocket expenses. An FSA allows employees to budget for medical expenses that are not covered by insurance. It is reported that the average family spends between $800 and $2,500 each year on medical expenses. By using an FSA, such expenses may be payroll deducted on a pre-tax basis, resulting in significant tax savings for both the employee and employer.

Dependent Care FSA

This account allows employees to pay dependent care expenses pre-tax. Married couples filing jointly and singles, may elect up to $5,000 annually pre-tax. This results in significant tax savings for both the employee and employer. In nearly all cases, the flex deduction through the employer is double that of the tax credit.

Individual Health Premium Account

Use the Individual Health Premium Account (IND) to pay for premiums billed to the employee's home or from a spouse's employer. Employees must request reimbursement similar to the daycare or health FSA.

Employer Advantages

• FICA tax savings of 7.65% on every dollar the employee puts in the plan
• Flexibility in budgeting for and controlling escalating benefit costs
• Flexibility in benefit choices
• Employee morale
• Competitive benefit plan that helps to attract and retain employees

Employee Advantages

• Tax savings from Federal, State, and FICA
• Budgeting for medical and child-care expenses
• Choice in selecting benefits
• Morale booster
• Use pre-tax dollars to purchase "out of pocket" expenses that they're already buying (i.e., daycare, insurance premiums, deductibles, co-pays, over-the-counter medications, etc.)
• Increased take-home pay due to ability to spend pre-tax dollars

Employer's Responsibility/Legal Requirements

• Plan Document: Employer simply completes our Adoption Agreement that defines the plan parameters.
• Plan Year. IRS guidelines require that a plan year be no more than 12 months, but shorter plan years may be beneficial in some cases.
• IRS guidelines require that the plan is installed to benefit employees, not exclusively for highly-compensated officers or owners. To ensure compliance, CPHR will perform IRS-required "non-discrimination tests" as part of our annual fees.
• An annual Form 5500 report must be filed after the plan year ends, when applicable.
• All plans must forbid election changes off of the plan renewal unless a change in status occurs.
• All funds not claimed by the end of the plan year are forfeited back to the employers.

Uniform Coverage Rule

A rule that is part of some of these plans, Uniform Coverage requires employers to make the full amount of coverage available to participating employees from the start of the plan year, regardless of how much they've paid into the account. For example, if the employee has elected $1,200 per year and has a claim for glasses in the amount of $200 in the first month of the plan, eFlex is required to pay the full claim to the employee. We help mitigate your risk using the following methods:

• We form a partnership for your staff to advise us when the employee is leaving your
  company.
• In the initial plan design phase, you may limit the amount employees elect per year.
• Limits are advisable when turnover approaches 7-15% per year.
• You (the employer) are required to provide funds to eFlex when the account goes below zero.
• You may use forfeited funds to offset potential losses and/or plan expenses.

Use It or Lose It Rule

In some plans, funds the employee elects in their FSA that are not claimed within 90 days from the plan year end are forfeited to the employer. The funds are typically used to offset administration fees or "uniform coverage rule" expenses.