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WORKFORCE
What’s In Your
Cafeteria
By
Anne Rawland Gabriel
Susan wants a transit allowance, Dianne wants an extended
vacation and Jim
wants additional medical coverage for his new baby. To compete with the big
dogs you have to pony up the perks, but you must do it on a budget. How? By
morphing your current benefits package into a so-called “cafeteria” or
“flexible
spending” plan.
Essentially,
a cafeteria plan is a set of employee benefits pooled together under
one funding umbrella. From this pool, or “menu,” employees select the
benefits
that fit their needs. “The brilliance of cafeteria plans is that all
contributions are
pre-tax,” says Mike Bromelkamp of professional services firm Olsen Thielen &
Co., Ltd. “This means you
reduce payroll taxes and your employees save on
income, social security and Medicare taxes.”
Strength
In Numbers
For
example, if you provide childcare assistance as a stand-alone benefit, the
amount you give an employee is considered income and, therefore, taxable.
However, if you include the same benefit under a cafeteria plan, the amount
you provide isn’t subject to payroll or personal income taxes.
“Cafeteria
plans are great because they take what you’d pay to the government
and give it to employees,” asserts Bromelkamp. “They’re popular with workers
because they not only reduce the bite of personal income taxes but also allow
for enhancing benefits pre-tax, such as boosting employer-provided long-term
care coverage.”
In
addition to savings advantages, cafeteria plans are powerful attraction and
retention tools. “An empty nester has much different needs than a young post-
graduate,” Bromelkamp points out. “Dental benefits may be more attractive to
me as I age, while extra vacation days may be a hot button for young post-
graduates.”
Sky’s
The Limit
So
what benefits can you provide with a cafeteria plan? “Whatever you want,”
replies Bromelkamp. “You can offer employees as robust a plan as you’d like.
However, only certain fundamental benefits qualify for pre-tax contributions.
In
other words, you can start with a cafeteria plan at the core of your package
and
add after-tax benefits as appropriate for your business needs.”
As
for the benefits eligible for inclusion, the most notable are:
·
Accident and health
insurance plans (including long-term care)
·
Dependent care
assistance
·
Elective contributions
to a 401(k) plan
·
Elective vacation days
· Flexible spending
accounts (e.g. health or dependent care reimbursement)
·
Group-term life
insurance
·
Qualified
Transportation (e.g. transit or parking reimbursement)
No
Load
Another
attraction is relative ease of implementation. “You’re required to
prepare a “Plan Document” detailing the specifics of your plan and keep it on
file,” Bromelkamp says. “Typically, an accountant will charge about $400 -
$500 to create a plan document for you, depending on rates in your area.”
In
addition, maintenance is minimal. The primary reporting requirement is filing
IRS Form 5500 annually, a nominal chore usually relegated to whoever
performs your payroll tasks. “The main responsibility for recordkeeping,
falls to
employees,” Bromelkamp says. “For instance, tracking the amount remaining in
a flexible spending account is the beneficiary’s job. However, many
businesses
do provide regular statements as a retention tool.”
The
Fine Print
Not
surprisingly, there are limitations to cafeteria plans for employees and
employers. For employees, some benefits have a per-year cap and others
require setting specific payroll deductions prior to the beginning of the
year.
Most significant is the annual depletion rule. “It’s important that employees
understand their benefits are ‘use it or loose it,’” says Bromelkamp.
“Benefits
can’t be carried over from year to year.”
The
main hurdle for employers is targeting the right workers. “Cafeteria plans
are supposed to benefit the masses,” explains Bromelkamp. “If too many ‘key’
or ‘highly-compensated’ employees receive a particular benefit, then the tax
advantage for that benefit will be disallowed for all.”
To
establish a suitable cafeteria plan Bromelkamp suggests contacting your
accounting professional. “Cafeteria plans are cost-effective and low-
maintenance,” emphasizes Bromelkamp. “If you’re not offering one, you should
have a reason. If you don’t have a reason, then it’s definitely time to
establish a
cafeteria plan.”
Formerly an executive with a leading
software company and founder of
an award-winning marketing communications firm, author Anne Rawland
Gabriel now concentrates on writing and marketing communications
consulting from her offices in the Minneapolis/St. Paul metro area. She
can be reached at Mail@GetGabriel.com.
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