Section 125 Cafeteria Plans
Section 125 plans are a tremendous opportunity for you to enhance your benefits package. The Premium Only Plan (POP) is the building block of the Section 125 plan, allowing employees to pay group insurance premiums with pre-tax dollars. When you adopt our POP, your employees will save federal, state and FICA taxes on their contributions toward benefits. As their employer, you will save the FICA match on those contributions. In addition, your POP plan is the foundation for all other tax savings plans such as Flexible Spending Accounts and Health Savings Accounts.
Tax Savings – Employers save on payroll taxes (FICA, FUTA and SUI) and workers’ compensation premiums. Generally, employers save 8% on FICA taxes and 10% on each pre-tax dollar employers contribute toward premiums. Employees are saving money by making pre-tax contributions, while the employer is saving matching payroll tax, it is a true Win – Win situation.
Flexibility – Employers have greater flexibility in making decisions on how to effectively distribute costs to employees.
There are three primary types of Cafeteria Plans:
1. Premium Only Plan (POP)
If an employee is paying for any portion of their health insurance premium, a POP deducts their portion from payroll on a pre-tax basis, resulting in lower employee and employer taxes. POPs are the most common component of all Cafeteria Plans and are most often used in conjunction with Flexible Spending Accounts and Dependent Care Assistance Plans. Eligible plans are limited to the employer’s group plan(s) such as medical, dental and vision, as well as a number of voluntary products. (Disability plans should not be pre-taxed, otherwise the benefits are taxable.)
2. Flexible Spending Account (FSA) – General Purpose & Limited purpose
An FSA allows an employee to fund certain medical expenses on a pre-taxed basis through salary reduction to pay for out-of-pocket expenses that aren’t covered by insurance (for example, annual deductibles, office co-payments, prescriptions, over-the-counter drugs and orthodontia). The average working employee in America spends more than $1,000 annually on these types of benefits. By participating in a FSA, an employee’s taxable income is reduced, which increases the percentage of pay they take home.
- General Purpose FSA – Allows employees to use pre-tax dollars to spend on any qualified medical, dental, vision, and limited OTC items.
- Limited Purpose FSA – This is available for employees enrolled in an HSA and only covers qualified dental and vision expenses. This particular FSA program was designed to help employees fully utilize the savings in their HSA, without having to drain down their funds for big ticket items such as Lasik eye surgery or Orthodontia.
3. Dependent Care Assistance Plan (DCAP)
The Dependent Care Assistance Plan is an attractive benefit for employees who pay for day care, nursery school, preschool, before/after-school care, adult day care facilities, and adult in-home day care. Many employees don’t take advantage of this benefit and may be unaware of the significant tax savings. Employees may hold back as much as $5,000 annually of their pre-tax salary for dependent care expenses. By paying for dependent care with pre-tax dollars, your employees can save approximately 20 to 40 percent on their child-care expenses. Persons qualified for care under a DCAP also include:
- A dependent that is under the age of 13 when the care was provided and can be claimed as an exemption on a participant’s income taxes
- A dependent who is mentally or physically challenged and can be claimed as an exemption on a participant’s income taxes
- A spouse who is mentally or physically challenged
Uniform Coverage Rule applies to FSAs and states an employee’s annual election amount must be made available from the beginning of the plan year. For example, if an employee elects $2,000 for the FSA plan year and has a $1,000 medical claim in the first month, it is required that the employee is paid or reimbursed in full for the expense. The employer will collect the full election amount back from the employee throughout the course of the plan year. The one possible con to an FSA program is that an employee could spend their full election amount early in the year, and if they quite or are terminated, the employer has no recourse to collect those funds.
*Once a plan election is made for the year, the election is irrevocable unless the employee incurs an IRS-defined qualifying event like marriage, divorce, birth or child adoption, employment status change, etc.
Use-it-or-Lose-it-Rule applies to both FSAs and DCAPs and states the funds an employee elects must be utilized by the end of the plan year, otherwise, any unused funds are distributed back to the employer. Employees do tend to be very savvy about making sure they fully utilize their FSA benefit, it is often very rare that an employee is not able to spend their full election amount by the end of the plan year. The IRS does allow an employer to activate a 2 ½ month grace period, this gives employees additional time to use all their FSA monies.
Debit Card Access
BDS offers Debit Card capabilities to all employers. When the Debit Card is used, our staff loads the card with all the office visit and prescription drug copayment amounts, so the card will auto substantiate when it is swiped to pay for these common expenses. The Debit Card helps to alleviate the employee from constantly having to send in receipts for reimbursement. Once the Debit Card is swiped, the employee will receive an email, telling them whether the payment was processed or if they need to submit paperwork to our office for adjudication.
*The Debit Card cannot be used with the DCAP FSA, you can only be reimbursed from a DCAP by submitting receipts for Dependent Care expenses to our office. This is due to IRS regulations.
All employees have access to their account via the web or smart phone app 24/7. They will have the ability to view their account balance as well as all claims that were submitted year to date.
Full Service Administration
Benefit Design Specialists provides complete, full service administration of Cafeteria Plan services. We handle all aspects from a compliance standpoint: Document preparation, Discrimination Testing, Alerts, and Team Support. From the Administration perspective, our goal is to work with you and your employees focusing on Education, Funding Assessments, and Reporting. Our staff is available for employee meetings in whichever format works best for you and your employees. BDS provides employees with an Orientation Kit, as well as, instructions on how to effectively utilize online tools.
BDS has been administering FSA plans for employers since their inception. We enjoy working with employers and employees who see the benefits of using pre-tax dollars to pay for these qualified expenses that they know they will incur each plan year. With one point of contact for you and your employees, we can focus on making your FSA program a success.
Contact Us to learn how our FSA Administration services can benefit you and your employees.