There has been a lot of talk lately about flexible benefits. It may be that it's because the "end of the year" enrollment period is upon us. Once again, small business people are wondering what to do about a flexible benefits plan (also known as a cafeteria plan). It is worth the hassle or not?
In the past, the biggest obstacle to small business has been keeping track of the details. Recently, however, software has been developed which makes the administration burden very manageable and the resulting tax savings available to small businesses. This software usually runs on any IBM compatible personal computer .First, a definition: A cafeteria plan is a special kind of benefits plan authorized by Congress to allow employee benefits like health insurance and child care costs to be paid for with pre-tax dollars. It is called a cafeteria plan because employees can select some benefits but not others. The details of managing this type of plan can now be handled through the use of special cafeteria plan software.
Ideally, what should cafeteria plan software do? Cafeteria plan software has two objectives:
1. To ease the detailed record-keeping burden, keeping rack of each employee's flexible spending account, ongoing reimbursement balances, options selected, etc.
2. To be a very valuable tool to assist small business employers in persuading employees to participate.
This second point is important because decisions about benefits are very personal and individualized. When an employee enrolls, choices must be made just like choosing between a taco and a hamburger in a cafeteria. Simply stated: A cafeteria plan allows employees to choose some benefits but not others.
Let's take an example: Suppose a small business decided to include employees' "out of pocket" costs of health insurance, child care reimbursement, and other related medical costs (all the things you thought health insurance should cover but doesn't: eye care, chiropractic, dental, health care deductible, prescriptions etc.) How would the ideal software package help?
First, it would send the same message about employee choices to everyone fairly, which meets government standards regarding communication fairness.
Second, it would demonstrate a specific "what-if" computation of an employee paycheck BEFORE AND AFTER enrolling to see the result of each potential choice. Third, excellent software should illustrate: exact tax savings in all areas: FICA, state and federal (this adds up to roughly 30% of every dollar set aside in the plan); spendable income before and after enrolling (spendable income always goes up for those who enroll); comparison of savings from the cafeteria plan child care tax savings vs. those available through the IRS credit on the employee tax return; what savings from the cafeteria plan used to build an employee retirement fund will be worth upon retirement (the really good software packages can even illustrate the effects of inflation and approximate monthly incomes).
Also, the good software should be able to do all these illustrations both "on screen" and in a printed "hard copy"; should do the enrollment form (technical term: payroll reduction authorization) on the spot; and then should be able to summarize in print the total enrollments, payroll tax saving (FICA, FUTA, SUTA and workers compensation) for the employer.
Fourth, this software would make the administration of a cafeteria plan easy. This means it would make providing flexible benefits as normal as your regular payroll is now. Hence, excellent software should be able to read all the other essential employee information directly from ANY computerized payroll software system whether it be on a "mainframe," "mini-computer" or PC. Also, claims processing and accounting should also be done by the software, so that when checks are finally printed, it all balances out.
Fifth, if the package is really good it will also interface with your bank so that direct deposit reimbursements go via modem (electronically) to each employee's bank account.
Admittedly, this is a tall order. However, this software is available and has been reviewed by this author. Prices range from $500 to $50,000. A good PC version should cast $3,500 to $4,000.
The main point is that tax savings are available to small businesses and are not a nightmare to collect. So if in the above example, 50 employees signed up for a medium range of benefits, including health care, child care and some other benefits (eye care, dental), the tax savings to the employer would be approximately $11,000. Take out the software cost and it's still worth your time to consider.
Jonathan C. Felt is a software designer and partner in On-line Benefits, a Salt Lake-based benefits software firm.