Free money! No such thing you say? Maybe not, but it's the closest description that comes to mind for a "cafeteria plan." What is a cafeteria plan (also known as flexible benefits plan)?
Under Section 125 of the Internal Revenue Code, your business can provide benefits to employees before taxes. This means that employees can have more take-home pay for the same cost to the company. Sound pretty close to free money?So what's the catch? The catch is you have to have one of the plans to benefit. There are a whole lot of smart companies out there that have already taken advantage of this tax break, which means those who haven't "pay more buck for less bang".
Any more catches? Yes, one. You have to keep track of some details because your employees each get to pick their own menu of benefits to be covered - hence the name cafeteria. It used to be that this obstacle alone eliminated most small businesses from the game. It simply used to be too cumbersome.
Notice the phrase "used to be." With the advent of almost universal use of personal computers in the small-business setting, it is now possible for a very reasonable price to have software at your disposal that can assist with all the details. This makes a cafeteria plan practical.
What benefits can employees pay for with pre-tax dollars? The list includes the employee share of health insurance, child care, legal fees, and disability and life insurance. The flexible part for the employer comes from the freedom to select which types of benefits are made available. The employee side is flexible too. Employees choose from benefits available to fit their individual needs and circumstances.
What is involved? There are four stages in the process:
First, the employer adopts a cafeteria plan. Most benefits consultants know how to do this.
Second, the plan is explained to the company's employees. Usually this is done in a meeting with the employees at or near the first of the year.
Third, the employees who enroll in the plan. This is referred to as the enrollment process, and is very manageable using the new software now available.
Fourth, the employee then participates in the plan. The payments for some benefits are mailed directly to the carrier. For others, the employer manages the payments according to what is called the cycle of reimbursement. Once in this stage, the plan operates in a predictable cycle with seven steps as follows:
1. Employee submits election form.
2. Employer deposits money into a section 125 Trust Account from payroll salary deduction.
3. Employee incurs an eligible expense.
4. Employee submits the claim.
5. The administrator processes the claim. (Note: the administrator can either be the company or it can be a third party if you don't mind using a little of the tax savings to cover a small monthly fee.)
6. A benefits check (pre-tax money) is returned to the employee.
7. Employee receives periodic statements.
The reactions of small-business people who use a cafeteria plan are generally quite positive. Comments like "it's easier than we thought," "happy employees," "should have done it sooner," "this is one of the best plans we've participated in," "no problem" are examples of what I hear from clients. Complaints about the complexity are heard less and less as the impact of new software solves this problem.
Like all tax-related programs, there are a few hoops to jump, so it's not actually free money. But with the cost of benefits rising and taxes going up too, it makes a lot of sense to find out whether this type of plan will fit your company, not just because it's almost free money, but because it may be time that small business had access to the same type of benefits structure previously available to only larger businesses. This makes your business much more competitive in the market for good people.