Cafeteria Plans

Do it Yourself Cafeteria Plan Administration

Qualified benefits include: 

• Premiums deducted from the employee's paycheck for accident and health benefits including health care, vision and dental care (but not medical savings accounts or long-term care insurance). Exempt from FICA/Medicare/FUTA/Federal Withholding.
• Health flexible spending accounts for expenses not reimbursed under any other health plan. Exempt from FICA/Medicare/FUTA/Fed Withholding
• Adoption assistance . Subject to FICA/Med/FUTA- but exempt from Fed withholding
• Dependent care assistance. Exempt from Fica/Medicare/Fed withholding up to certain limits, $5,000 ($2,500 for married employee filing separate return). The exclusion cannot be more than the earned income of either the employee or the employee's spouse
• Group-term life insurance coverage Premiums for $50,000 are exempt from Fica/Medicar/FUTA/Federal withholding.  Over $50,000 exempt from Fed withholding & Futa only).  Special rules apply to qualify for this benefit. Find out more in IRS publication 15B available in PDF format at http://www.irs.gov

S Corp owners with more than 2% ownership do not qualify to participate in this plan. Plans that favor highly compensated or key employees require special attention -see your tax advisor.  Dependent care benefits include amounts placed into a flexible spending account under a salary reduction arrangement if the benefit provided was day care. 

Until recently implementing such a pre-tax benefit plan was costly. You had to hire out the administration to an outside service company. But we found a company that has put together a
"do-it-yourself cafeteria plan kit".  Click here for this companies guide to setting up and maintaining a cafeteria plan.

What is the break even of implementing a Section 125 plan?  Employers pay social security taxes on wages, but convert those wages to benefits and save 7.65%. To set up such a plan is $97 (for the templates for the plan document) and $197 per year for the software to track what needs tracking and produce a year end information return 5500 for the government.   The annual break even is calculated by taking the annual cost of  $197 and dividing by 7.65% or  $2,600.  Bottom line, if your employees contribute as little as $2600 in after tax deductions of health insurance premiums, setting up this plan costs you nothing and saves the employee social security taxes and federal income taxes of an average of $575.00.  Now introduce a dependent care plan to the mix with flex medical spending (cafeteria plan) and the employer begins to save thousands in payroll taxes and the employee's saves even more!  A win/win scenario for all. 

Not commonly known is the requirement to file a form 5500 with the IRS each year to disclose your fringe benefit plan has been suspended! That means the most technical part of complying with the regulations of Section 125 is no longer a barrier to getting started, so by all means, jump in with both feet.  Below is a quote from the IRS Website:

"The Internal Revenue Service reminds employers that they no longer have to file an annual Form 5500 and Schedule F for so-called “pure fringe benefit plans.”
1. Employers who in the past filed Form 5500 and the Schedule F (Fringe Benefit Plan Annual Information Return, solely to meet the reporting requirements of Internal Revenue Code section 6039D ("fringe benefit plans"), should file neither Form 5500 nor Schedule F. In fact, the Schedule F has been eliminated and the Form 5500 has been modified so fringe benefit plan information cannot be reported.

2. Fringe benefit plans are often associated with ERISA group health plans and other welfare benefit plans. The IRS announcement regarding fringe benefit plans does not cover these associated welfare plans. But, in many cases, a Form 5500 was not required for the welfare plan because it was exempt from filing a Form 5500 report under Department of Labor regulations. For example, fully insured or unfunded welfare plans covering fewer than 100 participants at the beginning of the plan year are eligible for a filing exemption. Unless exempt, however, ERISA welfare plans must still file in accordance with the Form 5500 instructions on welfare plan filing requirements."

Download IRS news release IR-2002-043 or the more technical IRS Notice 2002-24 describing cafeteria plans, flexible spending plans, and premium only plans are exempt from filing 5500
Form 5500 Filing Instructions

Need to do more research? Try this website
http://www.dol.gov/ebsa/pdf/rdguide.pdf
http://www.dol.gov/compliance/

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