What are the benefits to the small business owner?A number of benefits for the small business owner arise from allowing employees to enroll in the Section 125 Cafeteria plan: Benefits include:
- Employers receive an overall reduced rate in their employee benefits package, including a reduced payroll tax liability, worker's compensation taxes, and a reduction in taxes from other benefits including FICA, state unemployment and federal unemployment taxes.
- Employees receive additional benefits and savings from the cafeteria plan, and therefore have a higher level of appreciation and satisfaction in regard to their employment. This ultimately leads to improved morale, increased motivation, and enhanced focus on their work duties.
What are the benefits to the employee?The cafeteria plan allows the employee to receive a variety of benefits from enrolling in the program and transferring some of their salary to pre-tax dollars. Benefits include:
- More take-home pay that is not taxed; employees that take advantage of the cafeteria plan will have more of their salary by the end of the year as they will be paying less taxes.
- Employees benefit from the program when they file their taxes the following year with reduced gross income.
- Employees are able to use pre-tax dollars for certain insurance premiums, dependent care expenses, medical expenses, and other qualified expenses.
Special Considerations
- Use It or Lose It
As with a medical flexible spending account, funds that are added to the cafeteria plan throughout the calendar year must be used before the year is over, otherwise the remaining funds will go back to the employer. Employees should be aware of how much they plan to spend on qualified expenses, such as medical care expenses or insurance premiums, so that they are able to calculate their participating dollar amount accordingly. - Discrimination Testing
The offered cafeteria plan is required to follow a strict non-discriminatory code for all employees. The Internal Revenue Code requires employers to offer the Section 125 benefits program under the same terms to every employee that is eligible, regardless of their current compensation, job title, ownership, or other forms of discrimination. The Internal Revenue Code has testing requirements to be sure the employer is following their non-discrimination rule for the cafeteria plan. - Exceptions to Participation
While the cafeteria plan is offered to many employees of corporations, there are some restrictions. Sole proprietors are not eligible for the cafeteria plan, but their spouse is able to enroll if they are employed by the company as long as they follow the non-discriminatory rule of the Internal Revenue Code. The same goes for a partnership in which the spouse may enroll in the program if they are an employee of the company; however partners may not enroll. Employees of S-corporations are only able to participate in the program if they are not highly compensated according to the Section 125 requirements and are not shareholders of the company. - Funds Access
Employees that choose to enroll in the cafeteria plan must be aware of the funds available. The annual election of the flexible spending account under the cafeteria plan is available beginning on the first day of the plan year, which may vary for different businesses. The cafeteria plan may or may not start on the same day as their other insurance program. Each year, the employee must re-enroll in the cafeteria plan and use their funds within the calendar year, with a grace period of up to 75 days.
The Section 125 Cafeteria Plan offers a multitude of benefits for the employer and the employee thanks to the reduced taxes and pre-tax dollars for qualified expenses. Along with other benefits offered by employers, the cafeteria plan is enticing for inclusion in an overall benefits package.
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