The Benefits of Cafeteria Plans - Report Example

and number (day/month/year) Cafeteria Plan: Report This report provides details on what is commonlyknown as A Cafeteria Plan: a type of plan offered pursuant to Section 125 of the Internal Revenue Code that allows employees to choose between a myriad of different types of benefits (i.e., the term, Cafeteria). (Wikipedia, Cafeteria Plan) New stipulations instituted in 2005 now allow employers to design cafeteria plans that enable participants to be reimbursed for claims incurred up to two and one-half months after the close of a plan year. [Previous rules allowed claims to be filed with a specific one year guideline] Given that our company is considering instituting such a plan, this report will seek to clarify its details and explore its benefits to the company and its employees. Information is presented in coordinated sections based on particular information that may be relevant and helpful to the company in making its final decision, and eventually to our employees in making decisions regarding their benefits should the plan be instituted. Plan Overview Employees of companies with cafeteria plans may obtain such benefits as health insurance, group-term life insurance, auto insurance, business travel accident insurance, flexible spending accounts for a variety of expenditures [medical et al]. [Lists of covered benefits are available through the IRS and other sources.] Implementation of a Section 125 plan is generally and primarily done for tax savings advantages both for employer and employee to affect an increase in spendable income. Under the plan employees contributions to most benefit packages of choice, such as health care, are pretax and therefore not subject to federal, state, or social security taxes. Employers save on the employer portion of FICA, FUTA, and Workers Compensation premiums. “...employers can [also] offer employees a choice of benefits or cash and qualified benefits,” with [most] benefits being untaxable as income and cash taxable. (MHM Resources, IRS Section 125...para. 1) “A choice of taxable benefits might include group automobile or homeowners insurance, vacation days or cash. Despite the fact that these benefits are taxable, they are still considered benefits, since employees may not have had access to them if not for the plan” (MHM Resources/Cafeteria Plan...para.4). Flexible Spending and Specified Accounts Flexible Spending Accounts (HSAs) associated with the IRS Section 125 Cafeteria Plan allow participants to use set aside tax-free dollars to pay for medical expenses not covered under the company health insurance plan. Plans may include coverage for areas such as dental, vision and adoption [some company plans allow the use of pre-tax dollars for adoption costs] but ‘There is a limit to the total amount of money that can be contributed to such a plan for adoption costs...A tax credit of up to $12,150 ($12,170 in 2010) can be taken to pay for qualified expenses” (MHM Resources, Adoption Costs, para. 3). Dental, vision which may be excluded from health coverage can be covered under flexible accounts. (MHM Resources, IRS Section 125, para. 3) However, Flexible Accounts require the purchase of a cheaper high deducible health plan, producing a savings for the company and the employee, depending on benefits chosen. Debit cards allowed by some plans eliminate claim paperwork for both the employee and employer since payment for bills can be drawn directly from the account. POP Accounts (Premium only) plans allow employees to elect to withhold a portion of their pre-tax salary to pay for their premium contribution for most employer-sponsored health and welfare benefit plans. The plan offers a simple way to obtain favorable tax treatment for benefits already offered. Most companies set this up through their payroll provider. A POP plan is the simplest type of Section 125 plan and requires little maintenance once its been set up through payroll. (Bryson 1.). Pertaining to company health coverage in general, consideration when opting for a cafeteria plan should include impending changes in health care reform currently before the Senate that may require “Certain large employers that have ‘extended waiting periods’ (periods that exceed 30 days) before employees can enroll in coverage under employer-sponsored plans would have to pay fines for each full-time employee...and “create a tax on employer-sponsored high-end “Cadillac” insurance plans” of “40 percent of the “excess benefit” of plans that exceed the thresholds of $8,500 for individual coverage and $23,000 for family coverage” (HR Hero Alerts, para. 2-3). Other stipulations may include rules affecting cafeteria plans and their administration and costs such as: prohibiting health plans from establishing lifetime limits or unreasonable annual limits on the dollar value of benefits; barring issuers from rescinding insurance plans or coverage in most circumstances; requiring plans to provide coverage without imposing cost-sharing requirements for certain preventive health services, and dependent coverage of children available to unmarried young adults up to age twenty-six. (HR Hero Alerts, para.4-7) Commuter Benefit Accounts “offer employees up to 40% tax savings on work-related travel expenses. They are part of a transportation benefit offered under IRS Code 132” (MHM Resources, Commuter Benefits Accounts, para. 1), which allow deduction of travel expenses free of federal, state and social security taxes. Reimbursements are limited to $230 per month through 2010. Qualified expenses include transit passes-- tokens, fare cards, and vouchers. (MHM, Commuter Benefit Accounts, para. 3) Child Day Care and Adult Elder Accounts if chosen as benefits can help defray costs currently experienced by employees and placate workers who may currently be distracted at work by worries about their charges. Plans offered by employers “both in home and out of home services can qualify for reimbursement. Registration fees, food, and incidental expenses may also be covered” (MHM, Daycare Costs, para. 3). Any care given in-home or out-of-home qualifies under many plans. 401K Accounts. Coval and Sharman discuss The Supreme Courts decision in LaRue v. DeWolff, Boberg & Associates, Inc. as potentially opening litigation doors of which companies should be aware.. In the ruling the Court said the Employee Retirement Income Security Act (ERISA) allows an employee to sue his employer because of a fiduciary breach that results in individual losses to his 401(k) plan. Cobal and Sharman make two opposing predictions: 1. A significant number of the 50 million U.S. workers with 401(k) plans will find a reason to sue, thereby bringing harm to employers who won’t be able to continue funding benefits because they’ll have to spend so much defending lawsuits. 2. No dire consequences will follow. The ruling doesn’t give everybody who suffers a 401(k) loss a license to sue. It just allows suits by individuals who can show they were wronged because of mismanagement or misconduct. There have been a number of similar state rulings that haven’t unleashed a flood of lawsuits. (Coval and Sharman, para. 4-5) Employer Contributions A caution for contribution under a Cafeteria Plan should be noted and researched. Recent HSA regulations indicate that if the employees have the option to contribute through pre-tax salary reductions through a Cafeteria Plan, the employer contributions are also considered as going through the Cafeteria Plan and thus subject to certain “nondiscrimination testing rules...if a salary reduction option is set up” (TXCafe, 3rd post). Summary Full flex benefits can satisfy the needs of a diverse group of employees by allowing them to control their benefit elections. The defined contribution approach of a full flex plan allows an employer to more accurately predict benefit costs. Employers can strategically price plans to influence benefit elections. For instance, properly structured credits can encourage employees who otherwise don’t need coverage to opt-out of one or more plans and reduce employer premium expenses... To qualify for a full flex plan, employers’ plan must include two or more benefits consisting of at least one cash and one qualified non-taxable benefit. Employer must have sufficient enrollment in various benefit insured plan options to ensure stability of costs or premium rates. (Arlenegroup, para. 3-5) Bryson praises the benefits of even limited Cafeteria Plans as “One of the most underrated and underused employee benefits available for small businesses” ( para. 1). “...utilizing the tax code for your business can be an incredible way to enhance your employee benefits package, while simultaneously and boosting your margins” (para. 2). While Cafeteria Plans obviously provide benefits for both employees and employers, careful scrutiny risk actuaries and accounting staff should be applied before entering into any plans for the purpose of calculating actual benefits to both. Works Cited Bryson, Trent D. “The Benefits of Cafeteria Plans.” Entrepreneur (Web Site) 14 September, 2005. Retrieved from: http://www.entrepreneur.com/humanresources/ compensationandbenefits/article79978.html Coval, Michael A. and Joelle C. Sharman. Supreme Court’s 401K Ruling: What it means to Employers. HR Hero Audio Conference. April 30, 2008. Retrieved from: http://www.hrhero.com/audio/401k_ruling/?TOP Full Flex Cafeteria Plans. Arlen Group Employee Benefits (Webs Site) 28 April, 2008. Retrieved from: http://www.arlengroup.com/facts/fact_cafeteria.pdf HR Hero Alerts. Many Implications for Employers in Senate Health Care Reform Bill. Human Resources News: 22 November, 2009: 3:57pm. Retrieved from: http://employmentlawpost.com/hrnews/2009/11/22/many-implications-for- employers-in-senate-health-care-reform-bill/?TOPIC MHM Resources, LLC. IRS Section 125 Cafeteria Plans; IRS Section 125; Cafeteria Plan. (2009). Retrieved from: http://www.mhmresources.com/articles/irs-section- 125-cafeteria-plans.html TXCafe (Reply) to: Pros and Cons—Pre-tax, After-tax HSA Contributions query. Retrieved from: http://benefitslink.com/boards/index.php?showtopic=34096 Wikipedia (2007) Cafeteria Plan. 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