One way you can give your staff more choice in the employee benefits they receive is to offer them a flexible benefit plan.
Flexible benefit plans allow your workers to choose from an array of benefits that they can pay for with pre-tax dollars, including health insurance, retirement benefits such as 401(k) plans and reimbursement accounts that they can use to pay for out-of-pocket health or dependent-care expenses.
In a flexible benefit plan, your employees contribute to the cost of these benefits through a payroll deduction of their before-tax income, reducing the employer’s contribution. You, the employer, can also choose to contribute to a portion of these benefits.
Besides the fact that your employees use money that hasn’t been taxed to pay for these benefits, the payroll deductions for them also reduce their taxable income while raising take-home pay.
A flexible benefit plan is especially attractive because it lets you choose which benefits you want. This is great since one size does not fit all in the world of employee benefits.
There are several types of flexible benefit plans, including cafeteria plans and flexible spending accounts.
A cafeteria plan lets your employees choose between receiving some or all of your non-taxable benefits, or receiving cash or other taxable benefits such as stock.
These plans were established by the Revenue Act of 1978 and are regulated by Section 125 of the Internal Revenue Code.
Only certain benefits can be offered under a cafeteria plan, though you may offer any or all of them. These include:
- Health and group life insurance, as well as medical reimbursement plans for non-insured expenses;
- Disability, dental and vision coverage;
- Day care or elderly care;
- 401(k) plans; and
- Vacation days.
A cafeteria plan can be funded solely by employer or employee contributions, or via a combination of the two.
Typically, employees will receive a spending credit to spend on benefits that can be chosen from a list of options.
One thing about these benefits: according to the IRS, you cannot carry over unused credits or benefits to the next plan year.
Flexible spending accounts
A flexible spending account (FSA) is a tax-deferred savings account that lets your employees pay for medical-related expenses and dependent care that may not be covered by their health plan.
A set amount is deducted from their pay every month on a pre-tax basis into an account. They can later use these funds to pay for qualified health insurance premiums, out-of-pocket medical costs, day-care provider fees, or private pre-school and kindergarten expenses.
Types of FSAs:
- Premium-only plans, which allow them to set aside funds to pay medical and life insurance premiums.
- Unreimbursed medical expense plans, which let them pay for health care expenses not covered by insurance.
- Dependent-care reimbursement plans, which let them set aside funds to pay for the care of dependent children.
Set-up and tax implications
A small business can manage its own flexible benefit plan with the proper software. Since these plans are regulated by the IRS, it is important that record-keeping and benefit payments be accurate and timely.
Many companies hire an outside firm to manage their plan, which reduces internal headaches but at a higher cost to the business. Some insurance companies also provide administrative services for flexible plans.
Employer contributions to cafeteria plans are tax deductible for the employer, and not subject to income tax for the employee. The contributions are taken before taxes, and therefore are not subject to Social Security or federal unemployment taxes, unless the monies are contributed to 401(k) plans.
Many states follow the same guidelines regarding state taxes, but companies should check with their accountant or the state’s tax department to be sure.
Remember: Flexible benefit plans are not without their drawbacks. But if you want to attract and retain key personnel with competitive benefit packages while keeping your own costs low, they can be an attractive alternative to standard benefit plans.
Call us for more information on setting up a flexible benefit plan.