Cafeteria Plans

Is a Cafeteria Benefits Plan Right for Your Business?

Cafeteria Plans are a popular option for businesses that want to offer employees a range of health benefits as well as the opportunity to customize their options.

The name comes from such plans that allow employees to choose among a variety of tax-deductible and non-taxable offerings to create a benefits package that best meets their needs and budget — similar to the ability of a customer to choose among items in a cafeteria line.

A Cafeteria Plan is a reimbursement plan governed by IRS Section 125, which generally allows employees to contribute up to $2,700 ($2,750 in 2020) of their gross income to a designated account or accounts before taxes are calculated.

This highly valued plan allows the Employer to reduce the Employees’ gross income, thereby reducing the amount the company pays under the Federal Insurance Contributions Act (FICA) or Social Security, Federal Unemployment Tax Act (FUTA), Workers’ Compensation, and some state taxes.

Employers contribute a dollar amount that employees put toward the options they choose, and the employee covers the rest. Alternatively, many benefits not funded but offered by the employer can also available to employees. Since contributions are made before taxes, it lowers the tax burden for employees as well as the FICA and other costs for both employees and employers.

These benefits may include health insurance plans, short- and long-term disability insurance, group term life insurance (up to $50,000, excess subject to some taxes), disability, dental, eye care and coverage for catastrophic issues, such as cancer, as well as retirement plans, adoption assistance plans, dependent care assistance ($5,000) and Health Savings Accounts (HSAs-subject to participating in a qualified HDHP).

Some technical details from the IRS Code, Section 125 include:

  • An employee may not elect for any taxable year to have salary reduction contributions in excess of $2,700 made to such arrangements in 2019 (increased to $2,750 for 2020). Exception: dependent care assistance ($5,000).
  • a uniform percentage (not less than 2 percent) of the employee’s compensation for the plan year, or
  • An amount which is not less than the lesser of —
    • 6 percent of the employee’s compensation for the plan year, or
    • twice the amount of the salary reduction contributions of each qualified employee.
  • Generally, there are no filing requirements.


What’s Different About a Cafeteria Plan? 

Participants in a cafeteria plan must be permitted to choose among at least one taxable benefit (such as cash) and one qualified benefit. Examples of qualified benefits (excludable from an employee’s gross income) are health benefits, 401K plans, life insurance, and HSAs.

The written plan must specifically describe all benefits and establish rules for eligibility and elections.

A Section 125 plan is the only means by which an employer can offer employees a choice between taxable cash and/or nontaxable benefits. A plan offering only a choice between taxable benefits is not a Section 125 plan.


Why Employees Like Cafeteria Plans

Cafeteria plans are designed to help employees build a customized suite of benefits based on their needs. A worker with a family may opt to have a full range of benefits, from health to dental care to life insurance. They may also set up an HSA to help pay for orthodontics and other child-related expenses. However, a young single person in good health may opt for fewer benefits.

The options within the cafeteria plan can include healthcare plans, dental and vision plans, Health Savings Account contributions, and 401K participation.  IRS Section 125 allows employees to have access to these benefits on a pre-tax basis. It’s estimated that workers can save from 25% up to 50% on healthcare purchases.

If an employee opts out of participation, they receive the employer contribution back in their paycheck. So, for workers, it is a win-win.


The Tax Benefits to Your Business

These plans have advantages for businesses as well. In today’s competitive job market, getting and keeping qualified workers is a challenge. Cafeteria plans get high marks from employees and can be a selling point for new hires. And, due to the pre-tax status of contributions, companies’ tax burden for FICA, FUTA, SUTA, and Workers’ Compensation rates are all reduced. This reduction can often offset the cost of offering these benefits.


What You Need to Know to Get Started

As we said, cafeteria plans provide pre-tax benefits and are governed by IRS Section 125. Knowing the basics of how these plans are implemented is essential.  However, if your business is considering offering a cafeteria plan to their employees, it’s best to use an experienced insurance broker to handle the design and administration. 

Each employer will need to provide plan documents to the IRS that include details on the plan options, costs, and pre-tax status. ERISA or Employee Retirement Income Security Act of 1974 also requires businesses to provide a Summary Plan Description. This document should include all plan information, who qualifies, the enrollment period, and any limitations. 

Lastly, the ACA requires all employers provide a Summary of Benefits & Coverage to each employee describing the available benefits as well as coverage application and restrictions.


Get It in Writing

In addition to making sure your workers know what options are available and what they will cost, one of the most important actions you can take is to get signed agreements that outline employees’ elections.

If a worker decides not to participate, he or she must sign a document that says they have waived participation in the plan. This step is important. 

Remember, these are pre-tax dollars, and as such, they will be deducted from a worker’s paycheck. The employee needs to authorize a business to do so. Without their signed authorization, a company could be subject to future lawsuits and litigation.

The Kirwan Companies helps business owners design, implement, and administer Cafeteria Plans. They will help guide you on the best most cost-effective options for your business and educate your employees on how to maximize their benefits. We have helped companies of all sizes throughout Pennsylvania, New Jersey, and New York. 

If you want to offer a Cafeteria style benefits plan today, please contact the Kirwan Companies us today.  We can answer any questions you may have to help you make the right decision for your business.

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