If you have a business that offers your employees health, dental, vision or life insurance with employee contributions you should strongly consider implementing a Cafeteria plan. Don’t let the name fool you, it has nothing to do with the consumption of any meals, it is a type of employee benefit plan governed by the IRS Section 125 tax code. The primary reason for implementing a Section 125 plan is for tax savings for employer and employee. Employers save on the employee portion of FICA, FUTA and workers’ compensation insurance premiums. Employees’ pretax contributions are not subject to federal, state or social security taxes and therefore increase their spendable income. A business is required to be enrolled in a cafeteria plan to take advantage of Section 125 of the tax code. If your business deducts insurance contributions before taxes without having a Cafeteria plan in place, you are at risk of being penalized by the IRS.
There are two main types of cafeteria plans that take advantage of Section 125, a Premium-Only- Plan (aka a”section 125 POP” “POP plan”Premium-only Cafeteria plans”) or a Flexible Spending Account (aka FSA). Each plan has its own unique benefits.
A Premium-Only-Plan (aka POP plan ) is a cafeteria plan which allows employees to pay their health insurance premiums contribution with tax-free dollars. It works by deducting the employee contribution premiums for health, dental, vision, accident, critical illness and group term-life insurance anon a pre-tax basis. This effectively lowers the taxable income and thus taxes for both the employee and employer. The Premium Only Plan must specifically state describe all benefits and establish rules for eligibility and elections. In California the approximately cost to set up and administer a Section 125 plan starts with $ 125.00 annually. However, we have seen companies like Paychex charging up to $ 500 annually.
A Flexible Spending Account, aka FSA , is quite different from a Premium-Only- Plan. An FSA may be offered for dependent care assistance, adoption assistance, and medical care reimbursements. The benefits are subject to an annual maximum and are subject to an annual “use-or-lose” rule. Somewhat similar to an HSA, an FSA allows both employees and their employers to contribute pre-tax dollars towards an account, in 2019 up to $2,700 in pre-tax dollars a year.
Depending on the medical needs for medical related expenses, dental, vision etc. and dependent care or adoption assistance the employee elects how much he wants to contribute towards the FSA account. The employer can also contribute towards each employee’s FSA to encourage employee participation. Please note that the FSA funds are under a “use it or lose it” funding; if you do not use your FSA funds in a given year, you can only rollover up to $500 towards your FSA for next year. Funds are not subject to federal, state or social security taxes. By contributing pre-tax dollars into an FSA, you are effectively reducing FICA, FUTA, SUTA & workers’ compensation insurance premiums. In California the set up cost for the employer is approximately $125 annual fee plus $35 per month which comes out to $545 per year and, as the employer, you also elect a determined amount of money each employee contributes towards their FSA for medical related expenses, dental, vision, and dependent care. The
At Solid Health Insurance Services, we are always happy to assist you with implementing a benefits program for your small business, which fits your budget and your employees need. Remember a solid benefits program will attract employees and keep your current employees satisfied. We are looking forward to assisting you! Contact us at 310-909-6135 or at email@example.com to go over your health, dental, vision and life insurance needs and see if a Section 125 plan is right for your business.