Flexible benefits programs, or cafeteria plans, can cut a company's benefits expenses and lower an employee's tax bill. Called Section 125 Plans for the section of the Tax Code that authorizes them, they let employees tailor their benefits more closely to their actual needs. Despite these advantages, many businesses do not know this option exists, according to Burton M. Goldfield of "Forbes." Flexible benefit plans aren’t all a bed of roses, though. Because the Internal Revenue Service (IRS) regulates most Section 125, instituting them can incur some extra administrative costs, especially at startup.
Benefits to Employees
Traditionally, employers have offered workers a predefined set of benefits. By contrast, a cafeteria plan allows workers to choose from a list of benefits and make premium and other payments with pretax dollars. This raises the employees' take-home pay because paying premiums with pretax dollars eliminates payroll and income taxes on those earnings. The company can deduct the premiums it pays for employee flexible benefits programs.
Benefits to Employers
When employees contribute pre-tax dollars to a Section 125 cafeteria plan, they reduce their taxable income, thus reducing the amount on which you pay payroll taxes. This can lower your company's payroll significantly as well, because you avoid Social Security and Medicare taxes, as well as unemployment insurance and workers' compensation payments, on the amounts paid into the cafeteria plan. For every $1,000 paid by employees into the plan, you would save at least $76.50 for FICA, and an additional amount representing the workers’ comp and unemployment insurance you’d save on that amount.
Employee benefit programs are designed to attract and retain talent. The greater flexibility you offer employees in your benefit programs, the more attractive you make your firm for employees. In addition, benefit dollars are much more efficiently spent when employees can apply them directly to the kind of benefit they need, instead of taking a one-size-fits-all benefit plan. If a worker already has health coverage under a spouse’s plan, for example, he or she may appreciate the opportunity to apply those benefit dollars to a different benefit.
Section 125 of IRS tax code requires certain duties on the employer's part. Your company must create a written plan, called a Summary Plan Description, with details such as the benefits you offer, annual limits and eligibility. Also, the company needs detailed records of when it pays benefits. Many businesses outsource their flexible benefits program to companies that specialize in administering such plans; in addition, the insurance company might offer administrative aid. An important consideration is that employees must be counseled that amounts are paid into flexible spending programs, like dependent care and medical spending, on a “use it or lose it” basis – that is, any amounts not spent by year’s end are forfeited.