Cafeteria plans offer fiscal benefits to employees, employers

Finally, an employee benefit plan that Uncle Sam will pay you indirectly to implement, and which will help your employees deal with the high cost of health care and with the high expense of dental, vision and dependent day care.

Section 125 of the Internal Revenue Code goes much farther than allowing an employee to use pre-tax contributions for their portion of health and dental premiums. Employees who participate in a cafeteria program can use pre-tax dollars to pay for all of their deductibles, office co-pays, prescription co-pays, coinsurance, vi-sion costs (including lasik surgery), dental, and orthodontia costs. There are many costs, such as up to $5,000 for dependent day care and the premiums for up to $50,000 for term life coverage that also can be paid for with pre-tax dollars.

Giving the employee the opportunity to pay these costs before taxes are taken out essentially allows the employee to create his or her own pay raise. An em-ployee who has $2,000 of unreimbur-sable expenses for their family, and is in a 15 percent federal, 6 percent state, and 7.65 percent FICA tax bracket would create an annual pay raise approximately equal to $575, or about $48 per month. Many employees will have much higher unreimbursable expenses due to day care costs and therefore re-ceive a much higher pay raise.

The benefit to the employer, in addition to providing an excellent benefit that is appreciated by employees, is that the employer saves matching FICA dollars. For every $100 the employee runs through pre-taxed, the employer saves 7.65 percent in FICA dollars. This FICA savings generally offsets the administration cost and can create substantial savings for the employer.

The key to a successful plan is proper employee education and communication, and choosing a good administration company. Employee education starts with good communication pieces.

As part of a pre-enrollment process, each employee should receive a brochure briefly explaining what a cafeteria plan is, a list of allowable pre-tax items, and a worksheet that can help illustrate the tax savings.

The employer then should have employee meetings to allow a representative to explain how the process works.

Generally a 10-minute video also is effective to help with the education process, as well as a 15-minute question-and-answer period that will include the seven lifestyle changes that help minimize the "use it-or-lose it" rule.

A viable cafeteria plan administration company will provide efficient administration that is cost-effective for the em-ployer, and provide an audit guarantee and Form 5500 preparation. For the employee, the administration company should provide access to reimbursement via mail, fax or Internet, with the ability to allow employees to have their reimbursements directly deposited into their checking accounts at no extra charge.

With direct deposit employees can file claims and have their money in their checking accounts in as little as three business days.

In addition, an administration company should provide the ability for the em-ployee to check their account balance via phone access through a toll free number 24 hours a day, and/or Internet access.

After enrollments and employee contributions are submitted to the administration company, employees can begin to submit requests for reimbursements di-rectly to the administration company. When employees realize how easy it is to receive reimbursements, especially those participating in dependent care, they will increase their pre-tax dollar elections, thus saving the employer additional FICA taxes.

Having all of these components will help assure an employee benefit that will help attract and retain valuable employees while creating a savings for the employer.

(Daniel G. Ruggeri is a charter life underwriter, certified health consultant and partner of Employee Benefit Design LLC.)