A “Flexible Benefit Plan” comes in many varieties, and usually refers to an Internal Revenue Code Section 125 plan that allows employees to pay for qualified expenses with pretax income. The most attractive feature of a flex plan is that it provides tangible benefits to both employees and employers. Employees who redirect salary to pay for qualified expenses never pay federal, state and social security tax on that portion of their income. Try the Savings Calculator to see how employees can save on their medical and day care expenses!
Employers enjoy tax savings too. Amounts employees set aside to pay for their qualified medical, dependent care, or parking expenses are not subject to employer payroll taxes. The annual tax savings for employers often more than offset all of the administrative expenses for the flex plan.
A Premium Only Plan is the simplest kind of 125 plan that just allows payroll-deducted insurance premiums to be subtracted from gross pay instead of from net pay. The employer doesn’t have to change anything about the insured benefit plans. It’s simply a tax-favored way to pay for benefits already in place.
- Employees can use pretax dollars to pay for coverage under the employer’s group health, dental, term life or disability plans.
- Taxable income is reduced by the amount of the premiums, so employees pay less income tax.
- Employers pay less in FICA tax, which helps offset the one-time setup fee in a few short months.
- The plan does not create any additional administrative tasks (and no administrative fees) outside of an annual 5500 filing.
Under this plan, employees can elect to set aside a portion of their gross income to pay for out-of-pocket medical or dependent/child care expenses. When an employee joins a spending account, his total annual election is divided by the number of pays in the plan year and deducted equally from each pay. These funds are held by the employer until claims are submitted. When the employee incurs qualified expenses and submits a claim, he receives a direct tax-free reimbursement from his account.
MEDICAL FLEXIBLE SPENDING ACCOUNT
Any qualified out-of-pocket medical expenses for the employee, his spouse or dependents can be paid through this account. If increasing deductibles or cutting benefits is in the future, a Flexible Spending Account provides a pretax alternative to paying these increased out-of- pocket expenses. This benefit is utilized by those who need and want it, without driving up total fringe benefit costs. Qualified expenses are those defined in IRS Publication 502 (Medical Expenses).
CHILD/DEPENDENT CARE FLEXIBLE SPENDING ACCOUNT
Employees can be reimbursed for the cost to care for their children, disabled spouse or dependent parent while they work. For married participants, their spouse must be employed, be a full-time student or disabled at the time the dependent care expenses are incurred. Expenses paid through a flex plan cannot be included in computing the child care credit on the employee’s tax return. In most cases the tax savings are better using the flex plan, but in some limited situations, employees may want to take the credit on their tax return. Employees should consult their tax advisor for guidance. Qualified expenses are described in IRS Publication 503 (Dependent And Child Care Expenses).
A Cafeteria Plan is another version of a Section 125 plan, just like Premium Only Plans and Flexible Spending Accounts. Employees use “flex credits” provided by the employer to “purchase” benefits from a menu of options. If the employee spends less than his allotted credits, he can take the excess in cash as taxable compensation. If the employee selects benefits in excess of the credits provided, the excess is deducted pretax from his pay.
A full flex plan is the best way to make sure employer-provided benefits are fully used. Many times employers are duplicating expensive benefits that are already provided by a spouse’s plan. Employees who do not need or want health insurance can choose other benefits or convert the credits to cash. Waiving health insurance coverage or opting for reduced coverage frees up benefit dollars that can be used to purchase optional coverage. Optional coverage could include dental and vision care coverage or FSAs for medical and child care expenses.
A full flex Section 125 plan is the only way an employer can legally provide this option. A formal written plan that spells out the available benefits, the eligibility, and the cash-out option is required whenever employees are trading compensation for benefits.
BENEFITS ALLOWED UNDER A FULL FLEX CAFETERIA PLAN:
A Section 125 Cafeteria Plan must provide for at least one or more nontaxable benefits plus cash.
|Health Insurance||Dental Insurance|
|Vision Care Insurance||Term Life Insurance (up to $50,000 coverage)|
|Disability Insurance||Flexible Spending Accounts|
Internal Revenue Code Section 132 allows employees to pay for parking and mass transit expenses through a salary reduction arrangement. This means employees can make an election to deposit a specific amount of income before taxes are withheld into a personal account for reimbursement of these qualified transportation costs:
Parking: Parking on or near the employer’s business premises or at a location from which the employee commutes by carpool, mass transit or commuter vehicle. Up to $230/month (indexed) can be paid with pretax income.
Mass Transit: Commuting to work via a mass transit provider (bus, train, subway). Up to $100/month (indexed) can be paid with pretax income.
Transportation Reimbursement Accounts work something like medical and child-care Flexible Spending Accounts, but with some major user-friendly differences:
- Elections can be made or changed at any time. Participants are not locked into a full year election.
- Unused amounts can be rolled over indefinitely until the funds are used for qualified expenses (no use-it-or-lose-it).
NEO can help you set up and administer a parking reimbursement for your group. Give us a call today!