For ambitious business owners, offering a competitive employee benefits package is crucial for attracting and retaining top talent. Health plans are a key draw, helping you recruit and retain valuable employees. A well-structured group plan also aligns employee interests with the company’s success.
Among the various employee benefit options, Cafeteria Plans stand out. These plans offer employees the flexibility to choose benefits à la carte, selecting only the options that best suit their needs.
Cafeteria plans, also known as flexible spending accounts (FSAs) or Section 125 plans, have gained popularity due to their ability to allow employees to pay for eligible medical expenses with pre-tax dollars, reducing their federal and state tax burden.
With an FSA, employees allocate a specific amount annually for non-reimbursed medical expenses. The two primary types of FSAs are dependent care reimbursement accounts (DCRAs) and health care reimbursement accounts (HCRAs). Employees use these accounts to pay for qualified out-of-pocket expenses. It’s important to note that FSAs typically operate on a “use-it-or-lose-it” basis, meaning unused funds at the end of the year are forfeited.
Cafeteria plan flexible spending accounts are generally exempt from income, payroll, and unemployment taxes. This exemption typically extends to payroll and unemployment taxes paid on behalf of employees. Consult IRS Publication 15-B for specific exceptions, including the treatment of highly compensated employees and certain S corporation shareholders.
Premiums for group life insurance policies are typically exempt from income and unemployment taxes. Additionally, premiums for up to $50,000 of coverage per employee are usually exempt from payroll taxes. Refer to IRS Publication 15-B for further details.
Cafeteria plans provide versatility in designing a benefits package. You can offer various fringe benefits that may be excluded from taxable income under IRS regulations. Establishing a DCRA and HCRA can be a great starting point for a cafeteria plan.
If you maintain a cafeteria plan, you are required to file IRS Form 5500.
The U.S. Bureau of Labor Statistics (BLS) publishes the Employment Cost Index (ECI) quarterly, tracking changes in employee compensation costs, including salaries, wages, and benefits. In addition to the ECI, the BLS conducts an annual survey of compensation costs.
Disclaimer: This information is for informational purposes only and not financial advice. Consult with a financial, tax, or benefits consultant for advice tailored to your specific situation. Consider hiring an interim benefits consultant or a full-service benefits consulting firm. Resources like the Employee Benefits Research Institute (EBRI), the International Foundation of Employee Benefit Plans (IFEBP), and the American Benefits Council provide valuable employee benefit plan information.