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What is a cafeteria plan?
A “Cafeteria Plan” is an umbrella for a group of employee benefit programs where eligible employees choose to participate and thus defer cash compensation. The IRS rules allow employees to use pre-tax dollars for payroll deductions for several of these programs; others can be non-taxed fringe benefits. The Cafeteria Plan guides the overall program in that these plans must not discriminate and most are ERISA plans. Specific Internal Revenue Code (“IRC”) sections govern the rules and procedures for each program within the Cafeteria Plan framework. These benefits are primarily for employees, there are significant limitations on the participation allowed for owners and partners.
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What are the advantages to an Employer of using pre-tax dollars?
Pre-tax dollars reduces the gross income prior to the payroll income tax calculations. So employees who choose to participate lower their Federal, State, and Local income taxes. For the Flex Plan and TFA Plan, the pre-tax dollars also reduce the FICA and Medicare Taxes. These plans then have additional benefits to the employer in that the employer match is lower.
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What are the basic benefit programs available?
Most employers start with a Premium Only Plan (“POP”) which uses pre-tax dollars to pay for their employees’ contributions towards group health insurance coverage.
The POP plan can then be expanded to include Flexible Spending Accounts for Unreimbursed Healthcare and Child/Dependent Day Care (“Flex Plan”). While the employer is not required to contribute to these plans, several employers have used contributions to the Unreimbursed Healthcare account to provide selective benefits (such as to provide limited dental or vision care).
Retirement Plans (401K or 403B) should be implemented as well as employer matches are not required, but can be used to incent employees to contribute.
Recently, Transportation Fringe Accounts for Mass Transit and Parking Expenses to commute to work (“TFA Plan”) have also allowed employees to use pre-tax payroll deductions.
Additional options provided have included Educational Assistance Plans, Time Banks, Legal Services, Tax and Financial Planning Services. In addition, various insurance companies offer payroll deduction products to employers to provide for group term insurance, long-term disability, and long-term care.
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Can I select specific programs to implement?
Yes, the programs can be implemented separately. In plan design consider your employee benefits plan strategy and how to effectively implement your programs. A caveat, you are affecting your employees’ paychecks, so even if the news is good, there are some concerns. So while a phased approach can work, a prolonged plan of constant change is not recommended.
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How does the Flexible Spending Account/Unreimbursed Healthcare account compare with a Health Savings Account?
The Health Savings Account (HSA) under IRS Section 223 is available only when there is a high deductible insurance plan (deductible of at least $1,000). Amounts are set aside in a trust account and are if not used can be carried over. Reimbursement generally follows the guidelines for items allowed in Publication 502 governing Schedule A of the Form 1040.
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If we have a Health Savings Account can we also offer a Flexible Spending Account?
Yes, but those employees using the Health Savings Account (HSA) cannot also use the Flexible Spending Account (FSA). However, an employer can adopt a Limited Purpose FSA which supplements the HSA and allows employees using the HSA to use the Limited Purpose FSA for those allowed expenses not coverd by the HSA (for example: vision care, dental care, over-the-counter drugs, health clubs when prescribed, amounts exceeding the HSA limit, etc.)
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Why a TFA Plan instead of a TransitChek program?
The TransitChek program was the first option available. However, the TFA Plan should be used if an employer feels the costs are prohibitive; not just the fees for purchasing the checks, but the costs of controlling the purchase and distribution of the TransitCheks (which are negotiable as cash to the bearer). The TFA Plan allows employees to be reimbursed for Mass Transit and Parking Expenses rather than use TransitCheks. With our TFA plan, the savings from lower payroll taxes (Federal, State, Local, FICA, and Medicare taxes) should offset our monthly administrative fees.
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Why implement a “Flex Plan” (Flexible Spending Accounts)?
While usually considered a low cost benefit, not every employer should implement a Flex Plan. Design considerations must be given to the potential costs and possible benefits. Meanwhile employers save on the match for FICA, Medicare and on FUTA taxes (saving between 1.45% to 8%). The Unreimbursed Healthcare account can be used to supplement group health coverage and can be used as a less costly alternative for dental and vision care. Meanwhile, employees benefit from using pre-tax payroll deductions will lower their payroll taxes by between 15% to 40% for moneys they will be spending anyway thus getting valuable tax deductions not otherwise available.
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What will the Flex Plan cost?
A Cafeteria Plan offers optional benefits but does not require the employer to contribute. Employers can provide many optional benefits, but do not need to make these free. By attaching a cost to each option, employees are asked to demonstrate the value of the option, while employers can control the overall benefits costs. Specific costs of the benefits program can be 100% paid for by employees’ contributions. The employer’s costs are usually the administrative fees if a third-party administrator is used and the internal time for making employees available to attend enrollment meetings, as well as for the payroll and human resources management.
Third-party administrators’ fees are varied. BSI Admin charges a setup fee (higher in the first year reduced thereafter), an enrollment fee (based on eligible employees) for the employee communications including individual counseling), and administrative fees (based on participation in the programs).
BSI Admin
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Are there minimum participation levels?
Not really. The question is whether there will be enough participation to justify the administrative costs.
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How do these accounts affect other benefits provided?
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What is the advantages of providing these benefits pre-tax
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Are these plans affordable? What will it cost me to implement?
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What type of administrative support can I receive?
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How much work will this mean for my Human Resources and Payroll functions?
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How long will it take to implement? When can I get started?
What is needed to start the payroll process?
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What are the key questions I must consider in plan design?
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Should employees contribute towards group healthcare coverage?
If group healthcare is provided at no cost to employees, then it must be provided unless the employee specifically waives the coverage. In most cases, an employer who does not ask employees to contribute may be paying for duplicate coverage. A small contribution (for example $5 per week) may be sufficient incentive to have an employee waive coverage when alternative coverage is available (spouse’s coverage).
Furthermore, if the premium contributions policy does not differentiate between the type of coverage, then employees who take family coverage may be receiving significantly more benefits than single employees. Employers have been reviewing the excess costs of employees using coverages that are more expensive than the basic single coverage.
Finally, additional options can be added via payroll deduction (for example, dental care, vision care, long-term care, group term insurance, long-term disability) which can be 100% employee funded.
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We are a small organization, does the Flex Plan or TFA Plan make economic sense?
That is the employer’s call. BSI Admin offers a small company package whereby there is a $600 minimum billing (reduced to $300 for companies with less than 5 employees or not-for-profits associated with the NPCC). More importantly, BSI Admin offers a “no cost” guarantees if you do not want to implement the plan after enrollment, you can cancel the contract without incurring any cost.
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Will it be necessary to contribute to a 401K or 403B plan?
Employer contributions are not required; however, if the highly compensated employees (“HCE”) owners, management, and key executives maybe limited as to what they can contribute if the others do not participate.
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