Johnson Administrative Services, LLC
Section 125 Cafeteria
Are you looking to provide an employee benefit package at little or no cost? You should consider establishing a section 125 cafeteria plan for your employees. It allows them to pay certain expenses, such as health insurance, out-of-pocket medical expenses, and child daycare with pre-tax dollars. Not only will it decrease your employees tax liability, but it will reduce your payroll tax expense as well. In most cases, the employer payroll tax savings exceed the cost of administering the plan. It truly is a "win-win" situation.
WHAT IS A CAFETERIA PLAN?
A Section 125 Cafeteria Plan is a written plan under which all participants can choose between two or more benefits consisting of cash and statutory nontaxable benefits. A cafeteria plan gives your employees the opportunity to save a considerable amount of money in reduced taxes. They can accomplish this through payment of certain qualified expenses (non-taxable benefits) with pre-tax dollars by redirecting a portion of their salary into the plan. The portion of income which the employee redirects through the Section 125 Cafeteria Plan is not taxed.
WHAT TAXES ARE SAVED?
On the amounts redirected through the plan, the employee will not pay:
- Federal income tax.
- State income tax.
- Social Security and Medicare tax (FICA).
Tax savings will vary depending on each individual's circumstances and income tax bracket.
Employers will save the employer-matching portion of FICA tax for every dollar that employees reduce their salaries. Additional savings may be realized in the form of reduced workman's compensation insurance, as a result of lower taxable wages.
WHAT NON-TAXABLE BENEFITS ARE ALLOWED IN A CAFETERIA PLAN?
- Accident or Health Coverage
- Flexible spending arrangements (FSAs) for medical expenses or dependent care.
- Up to $50,000 of group-term life insurance.
- Long-term disability coverage.
- Adoption assistance benefits.
- Dependent care assistance not exceeding $5,000.
- Health Savings Accounts (HSAs).
HOW DO I GET STARTED?
You simply choose which benefits you would like to offer to your employees. We will customize the Cafeteria Plan Agreement to meet your needs, and then set the parameters of the plan and the eligibility requirements on your Benefits Plan Document. The education and enrollment process for your employees will follow. They will make their choice as to what non-taxable benefits are desired through use of a Compensation Redirection Agreement. During the enrollment process I would be available to meet with your employees either individually or in a group setting to address any questions or concerns they may have.
WHAT DO OUR EMPLOYEES NEED TO DO TO GET MONEY REIMBURSED TO THEM?
If they have chosen to participate in the flex spending accounts they will have a payroll deduction each pay period. Those funds will be redirected to our trust account. Then the employees simply submit a claim form to the administrator, who then remits payment directly to the employee.
ARE WE KEPT UPDATED ON HOW MUCH IS IN OUR FLEX SPENDING ACCOUNTS?
Yes, on a monthly basis you will receive an updated report on how much has been placed in each of our flex accounts, how much you have spent and the remaining balance.
WHAT HAPPENS IF EMPLOYEES DON'T USE ALL THE MONEY IN THEIR FLEX ACCOUNTS?
The IRS rules require employees to "use it or lose it". It is imperative therefore, that they do not put more money into their accounts than will be spent during the plan year. Remaining balances at the end of the plan year revert back to the employer.
WHAT ARE HEALTH SAVINGS ACCOUNTS (HSAs)?
Health Savings Accounts are a new IRS-approved medical savings plan. Contributions to this new plan are tax deductible and distributions are tax-free if used for qualified medical expenses. More importantly, unused balances roll over from year to year. There are eligibility and contribution limits, but HSAs may be an attractive alternative to health flex spending accounts. With the rising cost of health insurance, an effective cost savings strategy could be implemented by switching to a high deductible insurance plan in conjunction with a Health Savings Account.
Each employer-employee relationship is unique. I would like to offer a free consultation to illustrate the potential benefits that a cafeteria plan implementation could create for you and your employees.
Contact us if you would like more information.
Johnson Administrative Services, LLC
214 North 7th St. Ste. #8
Norfolk, Nebraska 68701
E-mail us for a free consultation