Types of Plans

Types of Plans >
Who can Sponsor a Plan >
What are the Advantages >




Cafeteria Plans or pre-tax benefit plans come in all shapes and sizes.

  • Cafeteria Plans: A Cafeteria Plan is a reimbursement plan governed by IRS Section 125 which allows employees to contribute a certain amount of their gross income to a designated account or accounts before taxes are calculated.
  • Flexible Spending Accounts: A Flexible Spending Account is a designated reimbursement account under a Cafeteria Plan which allows employees to contribute a certain amount of their gross income to medical or dependent daycare accounts before taxes are calculated.
  • Health Reimbursement Arrangements (HRAs): An HRA is a type of Medical Reimbursement Plan (MRP) that allows the employer to contribute tax-free dollars to a designated employee account or accounts.  These accounts are for employee reimbursement of out-of-pocket medical expenses (including some insurance premiums and deductibles).
  • Health Savings Accounts: Health savings accounts are tax favored accounts that can be contributed to by or on behalf of “eligible individuals” covered by certain high deductible health plans (HDHPs) to pay for certain medical expenses of eligible individuals and their spouses and/or tax dependents.
  • Medical Reimbursement Plans: A medical reimbursement plan or MRP is an employer-funded health plan that reimburses employees, their spouses, and dependents for certain medical care expenses not covered through any other health plan.  An MRP is very similar to an HRA. However, unlike the HRA, an MRP does not establish employee accounts and therefore does not allow participants to carry over unused benefits to subsequent plan years.
  • Qualified Transportation Plans: A Qualified Transportation Plan (QTP) is a reimbursement plan governed by IRS Section 132 that allows employees to contribute a certain amount of their gross income to a designated account or accounts before taxes are calculated. These accounts are for specified transportation and parking expenses for commuters.

 

Who can sponsor a plan?

Who Can Sponsor or Participate in a Cafeteria Plan?

Virtually any company can sponsor a cafeteria plan for its employees, regardless of size. Eligible companies include:

  • “S” or “C” Corporations
  • Partnerships
  • Non-Profit Organizations
  • Government Entities
  • Limited Liability Companies (LLC)
  • Limited Partnerships (LLP)
  • Sole Proprietorships

There are some IRS restrictions on who is eligible to participate in the plan, however. Only employees of the plan sponsor (company) can participate. Non-eligible individuals include:

  • Self-Employed Individuals
  • Partners
  • A “More-Than-2%” Shareholder in an “S” Corporation
  • Owners of “C” Corporations, unless they elect no more than 25% of total plan contributions
  • Members of an LLC

 

What are the advantages?

What are the Benefits of Sponsoring a Reimbursement Plan?

There are several significant benefits to sponsoring a reimbursement plan. They include:

  • Tax Savings for Your Company
  • Savings for Your Employees
  • Offering a Stronger Benefit Program

 

Tax Savings for Your Company

In any reimbursement plan, all contributions made by the employer are non-taxable dollars. This saves your company a significant amount in Federal, FICA, FUTA, Workers’ Compensation and some State income taxes.

For example, a company with 50 cafeteria plan participants might save:

 

Expenses Before Cafeteria Plan Expenses After Cafeteria Plan
Annual Payroll $1,500,000 $1,500,000
Employee (EE) Paid Medical Premiums $0 -$75,000
EE Before Tax Medical Expenses $0 -$50,000
EE Before Tax Dependent Care Expenses $0 -$25,000
Taxable Payroll $1,500,000 $1,350,000
FICA Taxes (7.65%) -$144,750 $103,275
Annual Savings  $0 $11,475

 

Savings for Your Employees

Any contributions made to a reimbursement plan by the employer are non-taxable dollars to the employee as well. These amounts are a substantial benefit to employees for medical, dependent daycare, and transportation expenses. However, with a Cafeteria Plan, your employees save an additional amount in Federal, FICA, and some State taxes.

For example, an employee with a moderate income might save:

 

Income Before Cafeteria Plan Income After Cafeteria Plan
Monthly Salary $3,000 $3,000
Before-Tax Medical Expenses $0 -$100
Before-Tax Dependent Care Expenses $0 -$300
Taxable Salary $3,000 $2,600
Taxes-Federal & Social Security -$750 -$650
After-Tax Medical Expenses -$100 $0
After-Tax Dependent Care Expenses -$300 $0
Net Monthly Salary $1,850 $1,950
Monthly Savings $0 $100
Yearly Savings  $0 $1,200 per year

 

Offering a Stronger Benefit Program

An attractive and comprehensive benefits package can be an invaluable aid to your company. Not only does it increase employee satisfaction, in turn improving employee productivity, it can substantially decrease hiring and training costs by lowering turnover and increasing company loyalty.

For more information on how to show the true value of your employees’ total compensation package to them, visit myBenefitStatements.

 

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