Providing Employees With Flexibility and Choice

Today, flexible employee benefit plans like the Internal Revenue Code (IRC) Section 125 cafeteria plan are helping more and more business owners attract and retain valuable workers.

These plans are cost-effective for employers and allow employees to independently select benefits that fit their needs.

One of the greatest challenges when considering a cafeteria plan is to design a plan that satisfies employees, yet makes economic sense for your business. A qualified professional can help you review the options and determine what to include on your menu.

A wide variety of benefits are available as part of these plans, including the following:

  • life and disability insurance benefits
  • traditional medical benefits or HMO plans
  • 401(k) retirement plans
  • spending accounts for unreimbursed medical benefits and dependent care
  • ability to trade unwanted benefits for additional time off or money

In the most effective plans, the company and participating employees share the cost of optional benefits. The employee's contribution is typically made with pre-tax dollars in the form of a salary reduction; this also benefits employees by reducing their taxable income. Some employers may choose to "bonus" the employee's share of the cost instead of using a salary reduction.

Employees like cafeteria plans because they can choose benefits that fit their specific life circumstances – e.g., an employee who is covered under a spouse's health plan may choose another benefit in lieu of health insurance.

Employers benefit from cafeteria plans in two main ways:

  1. All plan contributions are deductible.
  2. The reduction in payroll associated with such plans eliminates the need to pay FICA (Federal Insurance Contributions Act) and FUTA (Federal Unemployment Tax Act) taxes. These taxes can be avoided if plan participants select their benefits before any cash benefit can be received.

It's important to provide enough benefit choices to meet employer and employee objectives without making your offerings too complicated to understand or administer. Too many choices can also lead to errors, particularly in calculating the credit use, since each credit is priced differently. Keep the program simple, especially at first. As you and your employees become more familiar with the plan, you may decide to add new options.

A qualified financial professional can guide you through the process of implementing a successful flexible benefits package for your business.

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