The
Law - The Revenue Act of 1978
created two new sections to the Internal
Revenue Code: Section 401(k) permits
deferred compensation for retirement
programs and Section 125 enables employers
to create a "Cafeteria Plan" which
allows employees to pay for certain benefits
on a pre-tax basis. Many companies
have taken advantage of Section 401(k)
but due to excessive administrative costs,
have not to create a Cafeteria Plan.
Why
Create a Cafeteria Plan? - Quite
simply, tax
advantages accrue for both the employee and employer! In
essence, employees reduces their income
by an amount equal to the cost of the
benefit. By reducing their income,
they lower their taxable base; thereby
reducing the amount they pay in Federal,
FICA and (in most States) State income
taxes. Conversely, when employees’ taxable
income is reduced, FICA and FUTA payroll
taxes paid by employers are also reduced. With
the implementation of a Cafeteria Plan
and utilizing the Cafeteria Plan Manager,
most employers tax savings pay the
the software in the first month of
operation. To estimate your firm's
annual savings, click here.
Potential
Employer Savings -
With employees below the Social Security
withholdings threshold, an employer
will be saving a minimum of $.0765
for every dollar an employee reduces
their income. For example, an
employer with fifty employees who each
elect to reduce their income by $1,500
per year (to pay for benefits on a
pre-tax basis) would actually save
the employer over (50 X $1,500 X $.0765)
$5,700 in the first year. With an average
employee tax savings of 25%, the same
employee would be saving over $350
in the cost of their benefits. Finally, a
WIN-WIN situation for the employee
and employer! Calculate
how much you can save.
Components
of a Cafeteria Plans -
There are three main components of a Cafeteria
Plan that can be implemented separately
or in combination. The employer decides
which components to include in their Cafeteria
Plan. The three most common components
are:
Premium
Reduction Plan -
A Premium Reduction Plan is the cornerstone
of a Cafeteria Plan because it offers a
benefit to virtually all employees and
is the easiest to administer. Under
a Premium Reduction Plan, employees elect
to reduce their income by an amount equal
to their cost for benefits. Then, the employer
pays for 100% of the benefit.
Medical
Reimbursement Plan -
A Medical Reimbursement Plan allows employees
to create an account to pay for benefits
not covered under the insurance plan (i.e.
deductibles, coinsurance and copayments).
At the beginning of each plan year, employees
decide what amount they want to contribute
to the plan. As expenses
are incurred, the employee submits eligible
receipts to the Plan Administrator and
is reimbursed with untaxed dollars.
Dependent
Care Reimbursement Plan -
A Dependent Care Reimbursement Plan allows
employees to pay for eligible dependent
care expenses (such as child daycare) on
a pretax basis. Similar to the Medical
Reimbursement Plan, employees decide each
year how much they want to contribute through
payroll reductions to their account. As
expenses are incurred, receipts are submitted
and reimbursed by the company to the employee
with untaxed dollars.
How
to establish a Cafeteria Plan? -
Now your company can easily create and
administer a Cafeteria Plan with COBRA
Solutions’ new Cafeteria Plan
Manager! Thesoftware was designed
to assist with the implementation of one
or more of the Cafeteria Plan components
and track, calculate and record employee’s
benefit elections. Plan Documents,
SPDs, Enrollment Forms are provided and
the software keeps track of employee's
accounts.
Easy to use, monitors
employee reductions and reimbursements,
offers a proven track record, affordable
price - these are just a few of the
reasons you should own the Cafeteria
Plan Manager. For further
information, please review the program's features.
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Cafeteria
Plan Manager 
