A Flexible Benefit Plan for the Flexible Generation
Since the advent of the “dual income with children” generation, employer-sponsored flexible benefit plans have become very popular with employees who appreciate the opportunity to choose options addressing their specific needs and budgets. Employees are able to select, within certain limitations, a variety of benefits without duplicating existing coverages and to tailor options to their cash flow constraints. With the Internal Revenue Act of 1978, employers are able to attract and retain employees with a cost-effective method called Section 125 cafeteria plans.
Because individual and family needs are so diverse today, as a business owner, it is imperative that all available options are reviewed with a qualified professional to determine, based on your census of eligible employees, which items you should include on your menu.
Among the choices usually offered are:
- Medical and dental insurance at various premium costs and coverages
- Spending accounts for unreimbursed medical benefits and dependent care
- Savings accounts
- 401(k) retirement plans, including deferred profit sharing and stock bonus plans
The employee’s portion of the cost of benefits is typically made with pre-tax dollars in the form of a salary reduction. This type of arrangement additionally benefits employees by reducing their taxable income, because costs associated with cafeteria plans are not considered wages. However, you may decide to “bonus” the employee’s portion of the cost rather than use a salary reduction plan.
Employee’s Added Value
Employees often consider cafeteria plans a big plus because an employee covered under a spouse’s health plan with another employer will not need health insurance and may choose another benefit in its place. On the other hand, a single employee might not select the same options as an employee who is married with children. In addition, younger and older age groups have different goals and lifestyles.
Employer’s Added Value
Employers equally benefit from cafeteria plans because the reduction in payroll associated with such plans may also substantially reduce FICA (Federal Insurance Contributions Act) and FUTA (Federal Unemployment Tax Act) taxes. Taxation is avoided as long as plan participants make their selection of qualified benefits before any cash benefit can be received.
A Win-Win Situation
Some employees may lack a complete knowledge of insurance and retirement plans. Offering your employees a Section 125 cafeteria plan may provide you with an opportunity to help your employees become better educated to make wise selections, as well as communicate to them the dollar value you are providing with the plan. You might wish to consider acquiring the services of an employee benefit specialist to counsel your workers, discuss the options available, assist in the enrollment process, and continue to walk with you while the plan is in force at your business.