While this policy won’t help you get seconds on lasagna at work, it could be the best financial decision for your business and employees. In fact a Cafeteria Plan can be the key to efficiently paying off debt and building your retirement savings.
A Cafeteria Plan is a reimbursement program monitored by IRS Section 125, which allows employees to contribute a certain amount of their pre-tax gross income to a designated account for distribution towards certain approved expenses or debts.
Cafeteria accounts can be used to pay for insurance premiums and medical or dependent care expenses not covered by other insurance plans.
Are there benefits for my business if my employees use these types of accounts?
These plans allow an employer to reduce their employees’ gross income, thereby reducing the amount the company pays in Federal Insurance Contributions Act (FICA or Social Security), Federal Unemployment Tax Act (FUTA), Workers’ Compensation, and some State taxes. That’s a win for everyone!
How does a Cafeteria Plan work, can you give me more details?
Most of your employees are already paying for expenses out of their own pockets (with after-tax dollars) when Cafeteria Plans offer them an easy way to save money. Here’s how it works:
1. Prior to the beginning of each plan year, an employee estimates how much they’ll spend in out-of-pocket medical expenses and/or dependent care.
2. This amount is then deducted over the course of the plan year from paychecks prior to being taxed, and is deposited into a flexible spending account.
3. Employees pay their out-of-pocket expenses and then submit a claim and documentation to your plan administrator to take a reimbursement from their own Health FSA.
Does participation in a cafeteria plan reduce someone’s social security benefits when he or she retires?
Yes, the simple answer is that it could. However, the tax savings you benefit from using this plan now to pay off debt could outweigh the reduction in social security benefits later. Give us a call to discuss your options in more detail.