What is a cafeteria plan and why would my employer not want to use one?
The phrase “Cafeteria Plan” is about Section 125 of the IRS code.It’s about the ability to deduct some benefits before tax rather than after tax.In general, the premium affected is the premium for the employees share of some group term life insurance (up to $50,000 of death benefit), group health insurance, group dental insurance, accident, and critical illness insurance.Also, employees are allowed to set aside a certain about of cash to pay eligible medical expense like deductibles.Employees benefit because by using the section 125 deduction they can save Federal, State and Social Security taxes on the amount that is deducted from their paycheck.For example, an employee with $200 a month of premiums and cash deducted BEFORE tax (through the Cafeteria Plan) could save 30 percent taxes - $60 a month.The employer basically saves their share of social security taxes. In the year 2018, the employer's portion of the FICA tax is 7.65% (the Social Security tax of 6.2% plus the Medicare tax of 1.45%) on each employee's first $128,400 of salary and wages.So for that same employee’s $200 a month the employer would save about $15 a month.So the employee saves and the employer saves. WHY you ask would the Employer NOT do this?#1 - The administration costs. It will probably cost the employer $50 to $200 a year per employee to administer the account.#2 - The potential of HUGE tax penalties if it’s done incorrectly. If the IRS finds out that some part of the plan paperwork hasn’t been done correctly they can deny all the deductions and fine the employer $100 per day (that’s $36,500 a year) PER EMPLOYEE.#3 - They don’t have to. It’s optional and most businesses already have far too much government paperwork.
What is section 125 plan?
A Section 125 plan is an employer sponsored benefit plan that allows any health insurance premiums paid by the employee to come out of the employee's pay before taxes. 125 plans also allow for the formation of two Flexible Spending Accounts, one for healthcare and another for dependant care. Employees can defer pay (again pre-tax) into one or both accounts. Qualifying withdrawals from the accounts (for either out of pocket medical expenses like copays, deductibles and healthcare items not covered by insurance or dependant care expenses like day care) are received tax free. 125 Plans are a great way for the participating employee to pay for necessities with pre-tax dollars. One caveat, the funds in the accounts must be used up in the year they were deposited. Do not overestimate the amount of your expenditures.
Why are premiums paid to employer-sponsored health plans allowed to be pre-tax, but individually purchased plans are taxed?
Section 125 (the cafeteria plan exemption) was implemented at the same time as 401(k) plans, as part of an overhaul of the tax code in 1978. The main reason for the overhaul was to try to push employers toward making the benefits of deferred compensation available to more than just a handful of highly-compensated employees - prior to the 1978 act companies were doing deferred compensation primarily for the benefit of corporate executives and a handful of other highly-compensated employees, while simultaneously cutting back on defined benefit pension plans.
Section 125 insurance plans?
The short answer is that a 125 plan allows you to make qualifying purchases with tax free money, so let's lay it out this way. Assume you make 1000 per week and your tax rate is 25% That means that your take home pay is 750 per week. Now you sign up for a 125 plan for 100 per week. The payroll takes 100 out before any taxes are calculated. Then they calculate taxes on 900 (1000-100), so 900 x .25 = 225. Your take home pay is now 900-225 = 675. (So far it sounds like a bad deal, right? While here comes the good part.) Next week you go to the dentist for a cleaning and he charges 100 for his services. You pay the bill and submit it to your company and they pay you the 100. You paid the dentist with tax free money, so the benefit derived is 675 + 100 = 775.
What does the less sec 125 of my w2 mean?
Section 125 covers what are called cafeteria employee benefit plans. Under section 125, employee contributions toward the costs of the benefits can be done on a pre-tax basis. That means that the deductions from your paycheck for those contributions are not part of your salary and wage base for income and FICA tax purposes.
What is a cafeteria plan?
A Cafeteria plan is a non-standard term, unfortunately. There are a number of different plans that are referred to by that moniker in California alone. Most frequently, I hear it used to describe either the Section 125 POP, a Flexible Spending Account or a multi-plan offering from a Carrier. All of these refer to Group-Sponsored plans. The multiplan offerings through a Carrier are just that: you can pick and chose from a variety of plans within the carrier, or in cases like the extinct Pac Advantage and the still operating Cal Choice, you can select from a variety of Carriers as well. Flexible Spending Accounts (FSA) allow you to take pre-tax deductions from your paycheck to pay for your qualified medical expenses. This is the Use It Or Lose It plan, however, as any fund allocated into you FSA that are unused at the end of the year are returned to the EmployER. These are best used to suppliment a medical plan, and can be used to pay for and medical bills you may incur. Section 125 POP is a plan designed to help you pay for your monthly insurance premium with pre-tax dollars. I'm not certain why this one is called a cafeteria plan by some people, as it doesn't have much in the way of options... I hope this was helpful.
Is health insurance supposed to come out of my check pre-tax?
In addition to what Deb Martin Law said, some companies extend healthcare coverage to unmarried domestic partners. Healthcare coverage costs for unmarried domestic partners cannot come out pre-tax because you can't file joint income taxes.
How can I get a misrepresented pre-tax cafeteria plan policy (AFLAC) cancelled before open enrollment?
Have your employer get ANOTHER company to come in and offer you a plan. You can replace their plan with another company's plan. You just can't cancel it. This wouldn't happen if your employer worked with a broker. Good brokers bring in good voluntary benefit companies....not just ones that advertise a lot. The BIGGEST misconception about Section 125 (as noted by the other responses) is that you're unable to make ANY change. It is true that you can't just cancel the policy with no other actions on your part. But, if your employer offered benefits from another voluntary benefits company (i.e. TransAmerica, Allstate, Colonial Life, etc...), then you could cancel your AFLAC accident plan (for example) and buy an accident plan from the new company as long as it was equal or better benefits. We roll into companies all the time that don't have competitive plans or have improper Section 125 plans set up and we fix everything.
What is to stop people from signing up with insurance companies, using them for the payouts available, and then switching to another company (and back again)?
What you are referring to is called Adverse selection and it keeps actuaries up at night.In the United States, there have typically been two different ways this risk was mitigated.For employer sponsored/group plans (the most common in the US), they are typically tax advantaged plans under IRS code section 125 (cafeteria plans). These tax advantages plans also mean that employees can not sign up or make changes to the plan at any time. Instead they can only enroll at initial eligibility, or once a year during open enrollment. Additionally, only qualified changes (such as adding a child or spouse) may be made outside the open enrollment period. You can't even drop coverage outside of open enrollment with a 125 plan. This helps keep people in the plan, rather than buying only when they need it.For individual plans, they have historically excluded pre-existing conditions and/or had a waiting period before certain benefits could be used. With the implementation of the Affordable Care Act, the pre-existing condition arrangement is going away, theoretically offset by the mandate which requires everyone to purchase insurance (keeping everyone in the risk pool). It remains to be seen if this works, or if young, healthy people choose to opt out of buying insurance.
What are some good ways to decide what health insurance reimbursement a small non-profit organization should provide?
To answer your question - most nonprofits use their peers as an index for determining benefits level. You want to offer coverage competitive with other orgs in the same revenue category and area of practice. Many of my <$1MM nonprofit clients cover between 50-70% of a basic plan for employee only ($100-250 Per Employee Per Month) except for one that has to compete with a union contract and covers 80% of a Gold plan for Employees and 50% for spouses.That said...I don't particularly like reimbursement plans, because they are administratively onerous, can impact recruitment, and can be problematic if you hire someone mid-year who doesn't have coverage -- they would not be able to obtain ANY health insurance until the 1st of the following year.Also, in many markets, individual plans cost almost as much as group plans but have reduced networks or require more effort to maintain. Remember that you're not just concerned about the bottom line dollar amount but also the impact of the plan on your employees' well being and productivity. If they're spending a lot of time fighting the system because of a sub-par plan or lack of support, they will be less effective serving your cause.Also, if you have a properly structured group plan, you can have the employees pay for their portion pre-tax via a Section 125 (Cafeteria) plan, which reduces FICA taxes (yes, nonprofits still pay those) and workers' comp premiums. Group plans can also be administered on a fixed-dollar contribution so the budget won't be impacted.