Cafeteria Plan.

A Cafeteria Plan is a separate written plan maintained by an employer for it's employees that meets the specific requirements and regulations of Section 125 of the Internal Revenue Code. It provides participants an opportunity to receive certain benefits on a pretax basis. Participants in a Cafeteria Plan must be permitted to choose among at least one taxable benefit (such as cash) and one qualified benefit.

A qualified benefit is a benefit that does not defer compensation and is excludable from an employee’s gross income under a specific provision of the Code, without being subject to the principles of constructive receipt.

The written plan must specifically describe all benefits and establish rules for eligibility and elections.

A Section 125 plan is the only means by which an employer can offer employees a choice between taxable and nontaxable benefits without the choice causing the benefits to become taxable. A plan offering only a choice between taxable benefits is not a Section 125 plan.

SECTION 125 CAFETERIA PLAN

Simple and effective way to add benefits. Section 125 plans (includes Premium Only Plans and Flexible Spending Accounts) provide a simple and effective way to add employee benefits, especially for businesses with a number of employees who regularly have medical and childcare expenses. Employees can deduct their insurance premiums pretax and set aside pretax funds to use toward qualified medical and dependent care expenses.

For business owners, this means decreased company payroll and tax liabilities for social security, Medicare, and unemployment. A Section 125 flexible spending account can save employers an average of almost $115 per participant in FICA payroll taxes – which can offset or be more than what you paid to start the plan.

With a Section 125 flexible spending account, employees can save an average of 30% in federal, state, and local taxes on items they already pay out-of- pocket.

On average, employees save from $.25 to $.49 for EVERY dollar they contribute to the FSA.

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PREMIUM ONLY PLAN

A POP provides a cost-effective alternative to satisfy an employer’s obligation. Premium Only Plans can be a great solution for some employers, especially employers who do not want to offer a full Flexible Spending Account Plan but still want to offer tax benefits for their eligible employees.

Why offer a POP? A POP provides a cost-effective alternative to satisfy an employer’s legal obligation when offering a pre-tax option for employer-sponsored benefits such as group insurance, or a Health Savings Account (HSA). However, it does not provide the same services and benefits as those available through a standard Flexible Spending Account (FSA).

A POP is a Section 125 Cafeteria Plan that allows employer-sponsored premium payments to be paid by the employee on a pre-tax basis instead of after-tax.

Coverage may include the following:

  • Group Medical
  • Group Dental
  • Group Vision
  • Group Disability
  • Group Term Life Insurance
  • Cancer Insurance

This results in a tax savings for both the employer, by reducing payroll taxes and administrative costs, and employee, thru reduced income taxes and increased take-home pay.

Employer Benefits:

  • Reduces payroll taxes (including Social Security and Medicare): for every dollar of employee contribution into the POP, employers save 7.65% FICA taxes.
  • Saves on the cost of administration: the tax savings gained often covers the entire cost of Plan administration.

Employee Benefits:

  • Reduces income taxes (Federal, State, and FICA): pre-tax payroll deductions result in a lower taxable salary.
  • Increases take-home pay.
Number of POP participants
National average paid employee premiums
Plan year
Pre tax dollars spent per year
30
$300 per month
12 months
$108,000

Employer FICA savings = $8,262 annually

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FLEXIBLE SPENDING ACCOUNT

Kazdon offers expertise in administering Flexible Spending Accounts (FSA’s). A flexible spending account is an employer-sponsored benefit that allows you to set aside pre-tax dollars to pay for eligible health care and/or dependent care expenses. With an FSA, the money you set aside to pay for these expenses is deducted from your salary before taxes are withheld. This reduces your taxable income, and consequently, your tax liability. You pay for your eligible expenses with tax-free money from your FSA.

The FSA is a powerful tax-advantaged tool that allows employers to improve their employee benefit package in a cost-effective manner. However, implementing an FSA can be overwhelming due to complex administrative and legal requirements. Kazdon eliminates that stumbling block by handling all aspects of the plan administration for you – accurately and efficiently.

As a trusted FSA administrator, we offer a simplified plan management experience for you and your employees, including:

  • Faster reimbursement of FSA eligible expenses with daily and weekly frequency options
  • Easier access to funds with FSA debit cards, simplified claims processing and direct deposit
  • Secure participant web site with online claim submission, real time account information, flexible reporting options and more
  • User-friendly mobile app

What are Flexible Spending Accounts (FSAs)?

A Flexible Spending Account (FSA) is a tax-advantaged benefit program established by an employer for their employees. This consumer driven account allows employees to use pre-tax money for eligible Section 213d healthcare and dependent care expenses. There are three different types of accounts that can be offered by an employer through this program: a Healthcare FSA, a Dependent Care Spending Account or a Limited Purpose FSA.

How Does an FSA Work?

The total employee election for an FSA is divided by the number of pay periods and deducted on a pre-tax basis from the employee’s paycheck. As a result, the employee’s taxable income is reduced by the election amount and therefore reduces the amount of taxes the employee will have to pay. Employers also save in payroll taxes for every dollar an employee elects, which results in a mutually beneficial program.

What is a Healthcare FSA?

Healthcare FSAs allow employees to pre-tax a preset dollar amount per participant (determine by IRS Reg) of eligible expenses. The FSA monies set aside by the employees are then reimbursed to the employee throughout the plan year as the eligible healthcare expenses are incurred, submitted and verified by the plan administrator. FSA eligible expenses include doctor visit co-pays, prescription co-pays, vision care, dental expenses and more.

In the case of Healthcare FSAs, another benefit of this program is that all funds are available on day 1 of the plan year. This means employees do not have to wait for these funds to accumulate in their account to submit claims.

Example: Kassidy elects $1,000 for the Healthcare FSA plan year that starts on January 1, 2017, and has 24 pay periods in the year. She will see a pre-tax deduction in each paycheck of $41.67. Kassidy and her daughter Amy visit the eye doctor to order new contacts and glasses for a total cost of $1,000 on January 2, 2017. Even though the first deduction of $41.67 will not be taken out until the first paycheck issued on January 15, 2017, Kassidy can submit a claim on January 2, 2017 to the FSA administrator with documentation and be reimbursed for the full $1,000. The payroll deductions will continue to take place after the reimbursement as scheduled throughout the year to make up the $1,000 FSA reimbursement that she received.

In addition, Kassidy’s taxable income was reduced by $1,000 and she is in the 25% tax bracket. So, she will save approximately $250 in taxes by participating in this program. Plus, Kassidy and Amy were able to get the services at the time they needed them because an FSA allows the first day access to funds.

What is a Dependent Care Spending Account?

Dependent Care Spending Accounts allow employees to pre-tax up to $5,000 (per household) of eligible expenses. The expenses must be for the care of dependents claimed on the employee’s federal tax return, which live with the employee and incurred while the employee is at work. Most commonly the account is used to reimburse daycare expenses for children under the age of 13. But, it can also apply for children of any age that are physically or mentally incapable of self-care. In addition, adult daycare for senior citizen dependents is also eligible as long as they are claimed as a dependent on the employee’s federal tax return.

Dependent Care Spending Accounts are funded the same way as a Healthcare FSA, but are reimbursed slightly differently. In order to reimburse FSA eligible expenses, the employee must have the funds available in the account.

Example: Michaela elects $5,000 for the Dependent Care Spending Account FSA plan year that starts on January 1, 2017, and has 24 pay periods in the year. She will see a pre-tax deduction in each paycheck of $208.33.

Michaela’s daughter Madison goes to before-and- after school care while she is at work at a cost of $100 per week. Michaela incurs an eligible $100 expense the first week of January that she pays for on January 7, 2017. However, she must wait until after her first deduction of $208.33 is taken on January 15, 2017 to submit her claim to the FSA Administrator for reimbursement. Moving forward, Michaela can reimburse herself after the eligible expense has been incurred as long as there are funds available.

In addition, Michaela’s taxable income was reduced by $5,000 and she is in the 25% tax bracket. So, she willsave approximately $1,250 in taxes by participating in the Dependent Care Spending Account FSA.

What is a Limited purpose FSA?

In cases where an employee has a High-Deductible Health Plan (HDHP) and Health Savings Account (HSA), a Limited Purpose FSA Healthcare may be established. Like a Healthcare FSA, this account allows employees to pre-tax a preset dollar amount per participant of eligible expenses. However, Limited Purpose FSA eligible expenses are “limited” to reimburse dental and vision expenses. At the employer’s discretion, eligible medical expenses incurred after the deductible may also be reimbursable.

As in the case of Healthcare FSAs, another benefit of the Limited Purpose FSA is that all funds are available on day 1 of the plan year. This means employees do not have to wait for these funds to accumulate in their account to submit claims to the FSA administrator.

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or call us today at 877-4kazdon

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NON-DISCRIMINATION TESTING

Whether you have a full Cafeteria Plan, Flexible Spending Account (FSA) or a Premium Only Plan (POP), the Internal Revenue Service (IRS) requires annual Non-Discrimination Testing of employees at the end of each plan year. Kazdon administration offers a complete compliance testing curriculum for each type of plan:

  • Cafeteria Plan Testing
  • FSA Health Care Testing
  • FSA Dependent Care Testing

What Types of Section 125 Non-Discrimination Testing of Employees are Available?

Cafeteria Plan Testing

  • 25% Key Employee Concentration Test – Ensures of all the pre-tax dollars being spent through the Cafeteria Plan, no more than 25% is being spent by Key Employees.
  • Eligibility Test - Ensures enough non-highly compensated employees are eligible to participate in the Cafeteria Plan.

FSA Health Care Testing

  • Eligibility Test - Ensures that enough non-highly compensated employees are benefiting from the plan.

FSA Dependent Care Testing

  • Eligibility Test - Ensure enough non-highly compensated employees are eligible to participate in the Dependent Care plan.
  • 55% Average Benefits Test - Ensures that, on average, highly compensated employee elections are in proportion to non-highly compensated employee elections.
  • 5% Owners Test - Ensures that any participants who own more than 5% of the shares of the employer are not disproportionably benefiting from the plan.