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Although Cafeteria Plans have been around since the mid 1980s, many people are still unfamiliar with them. There have also been many changes to the regulations as these plans continue to evolve.
If you have a question about your existing plan, or if you would like more information on these plans in general and how they operate please feel free to contact us. How does the plan benefit the employer? Every dollar the employee defers into the Cafeteria Plan is withheld before any taxes are calculated. The employer will save the portion of social security tax (6.2% to $68,4000 for 1998), Medicare (1.45%), and other taxes the state requires the employer to contribute on behalf of the employees. In addition, the Workers Compensation Premiums will be calculated on your employees' "after-flex" salary. Depending on the employers industry and Workers Compensation claims history, you may experience a substantial decrease in premiums. This reduction in payroll taxes could save the employer an average of 10 cents on every dollar that is run through the plan. How does the plan benefit the employee? Employees may elect to participate in any, or all, of the accounts that are included in their cafeteria plan. When employees elect to participate, your employees will save Federal, State, and Social Security taxes on every dollar that is contributed to the plan. What benefits can be offered as part of a Cafeteria Plan? The most typical plans have the option to run insurance premiums, Miscellaneous Health expenses, and Dependent Daycare expenses through pre-tax accounts. What is a Premium Account? A Premium account allows employees to have the portion of their company sponsored group insurance premiums that they are responsible to pay for, withheld before taxes are calculated. This can be implemented by itself (a premium only plan) or in conjunction with other pre-tax options. What is a Medical Reimbursement Account? The Medical Reimbursement Account allows employees to save all taxes on their family's heath-related expenses. Although most employers provide their employees with health insurance coverage, it typically does not reimburse 100% of your expenses. Employees may choose to itemize their out-of-pocket health related expenses on their tax return, but they will only receive a federal tax credit for any amount in excess of 7.5% of their adjusted gross income. When using a Medical Reimbursement Account, employees save all taxes on every dollar run through the plan. For a list of eligible expenses see the document titled Eligible Medical Expenses.doc attached at Forms for Cafeteria Plans (link). What is a Dependent Daycare Account? Instead of taking the Federal Tax Credit for work-related dependent daycare expenses, the employee may choose to participate in a Dependent Care Spending Account. Not only is the maximum allowable expense higher ($5,000 per family vs. $2,400 for 1 child or $4,800 for 2 or more children), but the employee will save all taxes on daycare expenses, rather than just receiving a federal tax credit on the expense. For a list of eligible expenses see the document titled "Eligible Dependent Care Expenses.doc" attached at Forms for Cafeteria Plans (link). How do I submit a claim for reimbursement? There are no reimbursements for the Premium portion of the plan. Once you sign up, the deduction will be taken from your pay and sent directly to the insurance carrier. For the Reimbursement Accounts: once enrolled, you should receive a confirmation letter and claim form. You will need to complete the claim form, and attach the appropriate receipts for expenses incurred, and mail/FAX it to your Plan Service Provider. At Resource Benefits Administrators we process all claims on a weekly or bi-weekly basis, depending on the frequency selected by the employer. In most cases, a check will be sent directly to the address listed on your enrollment form (same address the confirmation letter was sent to). Please note that claims are processed based on the date the services were actually provided to you or your family member, which is not necessarily the date the services were billed and/or paid for. Also, claims can not be processed based on an "estimated insurance payment" or "estimated patient balance", all insurance payments must be applied before the balance can be processed. For a claim form see the document titled Reimbursement Claim Form.doc attached at Forms for Cafeteria Plans (link). What is the IRS Form 5500? This is the IRS reporting for pre-tax plans. An employer taking pre-tax deductions from its employee's pay is required to file a Form 5500 annually if they have over 100 employees covered. What is a Nondiscrimination Test? The IRS developed Section 125 plans to help "rank & file" employees with their medical and daycare expenses. To make sure that the plans are offered to, and used by, those rank and files employees, the IRS has set up a complicated matrix of benefits testing to make sure that these plans are not exclusively used by corporate owners and highly paid employees. Pre-tax treatment under these plans is not available for sole proprietors, partners, or S Corporation shareholders. What are eligible medical expenses that may be run through the Miscellaneous Health Spending Account portion of the plan? Plan documents may be customized to limit the reimbursement of certain types of expenses. Most expenses listed in IRS publication 502 are generally reimbursable but you should check with your plan administrator and/or your Cafeteria Plan handbook for your plan specifics. For a list of eligible expenses see the document titled Eligible Medical Expenses.doc attached at Forms for Cafeteria Plans (link). What are eligible daycare expenses that may be run through the Dependent Care Spending Account portion of the plan? If you, and your spouse (if applicable) incur expenses for the care of your children, or a dependent adult (not capable of self-care), while you are at work you may be able run those expenses through the Dependent Daycare Spending Account portion of the Plan. The provider of service need not be a formal daycare, it may be any individual who is at least 18 years old, not a dependent, and willing to declare the income to the IRS at the end of the year. For a list of eligible expenses see the document titled "Eligible Dependent Care Expenses.doc attached at Forms for Cafeteria Plans (link). How do I enroll in the plan? Your company should have an open enrollment period during which they will distribute information on the plan and give you the opportunity to enroll for the coming year. What if I enroll in the beginning of the year and don't set aside enough money for all of my expenses? Can I increase my deductions? You may not change your elections or cease participation during the plan year without a qualifying change in family status. Most plans will allow you to make a change if you have a qualified change in your family status. Changes in family status can include: birth or adoption of a child, marriage or divorce, change in jobs of you or spouse, etc. Please check with your plan administrator for additional information. What if I set aside more money than I can use? Do I get the money back at the end of the year anyway? Can I roll it into next year's plan? No. There is a use it or lose it provision in the plan. The IRS requires any unused funds in the account at the end of the plan year be turned over to the employer, not the employees who forfeited them. The IRS has very strict guidelines on how these funds can be used by the employer. What if I change employers mid-year and I haven't submitted my receipts yet? Your eligibility stops when you terminate your employment, however services provided to you prior to your termination are still eligible for reimbursement. Most plans will give you 30-90 days to submit your receipts after you have left the company. You should check with your plan administrator for the specifics on your plan. |
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