What Is A “Cafeteria” (Section 125) Plan?
A Cafeteria Plan is a method to allow employees to select benefits instead of income. The plans are authorized under Section 125 of the Internal Revenue Code and must operate in compliance with that code section. Such plans should also be in compliance with proposed regulations issued by the Department of Treasury, which provides a “safe harbor” for plan operations.
Cafeteria plans result in tax savings for both employers and employees.
Employers reduce the gross wages subject to FICA resulting in savings of 7.65% on those funds directed through the cafeteria plan instead of through the normal payroll channels.
Employees reduce gross wages subject to FICA and Federal Income Tax as well as most state and local income taxes, where applicable. Employee savings depend on the employee’s gross taxable income and typically will range from a low of 22.65% to a high of 40% or more, if state or local income taxes apply.
Properly established and operated plans permit the employees to select benefits from a “menu” of choices created by the plan sponsor (the employer). These choices may include:
Group Medical Premiums
Dental Premiums
Life insurance up to $50,000 for the employee
Qualified voluntary insurance plans
Flexible Spending Accounts for both Medical/Dental/Vision and Childcare
Why Have A Cafeteria Plan?
Employees save money!
Participating employees save from 22% to 40% or more of the cost of tax free benefits they select. Exact savings depend on the employee's federal income tax bracket and any state income taxes.
Employers save money!
Participating employers save 7.65% (FICA) on all employee contributions, and may have additional savings on SUTA and FUTA.
Benefit plans work better!
Providing employees with benefit choices increases the employee's impression of the value of these benefits.
Benefit costs can be reallocated!
Tax free premiums can allow employees to pay a larger share of a plan cost without reducing employee's take home pay.
Hiring new employee's can be easier!
Almost all large (and many small to medium sized) employers now have cafeteria benefits. Potential employees often look for cafeteria benefits. Employers without such a plan are not competitive in the job market.
Why Have Compliance Services?
Because the IRS is watching! And, the cost of non-compliance can be huge. A 50 employee firm with a Premium Only Plan (POP) could face back taxes, penalties and interest of over $100,000 if the plan were disqualified.
However, since Section 125 was enacted in 1978 there has not been any major effort to audit these plans, leading many to believe the rules are not important.
That is now changing. In 1998 the IRS held a week long "Cafeteria Plan Industry Wide Meeting" for IRS personnel from around the country. The purpose of that meeting was to "raise the participant's awareness on all aspects of the cafeteria plans." Now when an IRS examiner finds a cafeteria plan they will be ready to look for compliance.
Why Use FBG?
FBG:
A professional Third Party Administrator (TPA), with E&O and bonding, will assure that your plan is properly set up and operated.
Will keep your plan (and you) in compliance with the rules to prevent possible tax penalties.
Has been in the cafeteria plan business since 1987.
Principals are known leaders in the cafeteria industry, frequent speakers at industry meetings, founders of industry seminars, and authors of cafeteria plan training textbooks.
The only TPA invited to speak at the IRS's 1998 training seminar for IRS field personnel on auditing cafeteria plans.
Provides cafeteria plan services to clients as small as 3 employees and as large as 10,000 employees.
Provides cafeteria plan services to clients located throughout the United States.
Uses a total concept approach, providing everything needed to set up and operate a cafeteria plan.
Large enough to serve any client and small enough to value every relationship.
Fully HIPAA compliant.
Fees are guaranteed to be LESS than the employer's FICA savings.
What Does FBG Provide?
FBG provides a "total concept" plan. Everything you need to set up and operate a qualified section 125 cafeteria plan is included in the FBG package.
Plan design consulting: including review of all benefits offered to assure the qualified status of those benefits.
Plan documents: customized to your plan using the state of the art CORBEL software program.
Enrollment consulting: to assist in the preparation of the enrollment and to assure proper communication of the benefits as required under the cafeteria plan rules and regulations.
Discrimination testing: to assure that the plan passes the IRS guidelines for a qualified cafeteria plan; performed following the enrollment and as often as circumstances indicate during the plan year.
Record maintenance: individual employee records are created and maintained throughout the year to allow FSA services, prevent inadvertent disqualification of the plan due to unauthorized charges and permit preparation of the form 5500.
FSA accounting: Flexible Spending Account (FSA) claims are reviewed and eligible expenses reimbursed with FBG performing all the review, record keeping and check generation.
Ongoing consulting: FBG provides ongoing 800 line access for any section 125 related questions from the employer or participation employees.
Regular reporting: FBG provides individual reports to the employer and all FSA participants at the time of each claim and quarterly during the plan year, as well as producing special reports when requested.
Year end reporting: FBG provides reports at the end of the plan year to assist the employer and employees in maximizing their benefit from the cafeteria plan and planning for the next plan year.
Form 5500: FBG provides a signature ready form 5500 at year end, if required.
