Cafeteria Plans Q & A
A law passed by Congress in 1978 has started a great tool for
employers and employees alike. Employers can get tax savings while
lowering the costs employees pay to participate in benefit programs.
As health insurance costs rise, this is a great tool to take advantage
of a tremendous method to reduce their costs. Section 125-Cafeteria
plans are known by many names, among them Premium Only Plan, Flex
Plan, Flexible Benefit Plan, Flexible Spending Account, Credit Plan
and more. All of these are actually Cafeteria plans.
A cafeteria plan must be established in writing. It must be for
the benefit for employees to choose among two or more benefits which
include cash and statutory, non-taxable benefits. Partners and 5%
stockholders of S-corporations are excluded from participation in
these plans. Plans must be tested for non-discrimination.
Q: What is a cafeteria plan?
A cafeteria plan is a written plan that allows a company's employees to choose between receiving cash or certain qualified benefits. Generally, a cafeteria plan does not include any plan that offers a benefit that defers pay. However, a cafeteria plan can include a qualified 401(k) plan as a benefit. Also, certain life insurance plans maintained by educational institutions can be offered as a benefit even though they defer pay.
The fact that your employee can choose between cash and qualified benefits does not make the qualified benefits your employee chooses to receive taxable to the employee.
Q. What are Qualified benefits?
A qualified benefit is a benefit that you can exclude from an employee's wages because of specific tax rules, including those discussed in this chapter. However, a cafeteria plan cannot offer scholarship or fellowship grants, educational assistance, medical savings accounts, long-term care insurance.
Q. What are some of the things that can be excluded from wages with a Cafeteria Plan?
You can generally exclude the cost of providing qualified benefits to an employee under a cafeteria plan from the employee's wages as pay, and report employment taxes. However, certain group-term life insurance coverage is subject to social security and Medicare taxes. Also, adoption benefits are subject to social security, Medicare, and federal unemployment taxes.
Q. What if my plan favors highly compensated employees?
If your plan favors highly compensated employees as to eligibility to participate, contributions, or benefits, you must include in their wages the value of taxable benefits they could have selected. A plan you maintain under a collective bargaining agreement does not favor highly compensated employees.
Q. What is a highly compensated employee?
- An officer.
- A shareholder who owns more than 5% of the voting power or value of all classes of the employer's stock.
- An employee who is highly compensated based on the facts and circumstances.
- A spouse or dependent of a person described in (1), (2), or (3).
Q. What if my plan favors key employees?
If your plan favors key employees, you must include in their wages the value of taxable benefits they could have selected. A plan favors key employees if more than 25% of the total of the nontaxable benefits you provide for all employees under the plan go to key employees. However, a plan you maintain under a collective bargaining agreement does not favor key employees.
Q. What is the current standard for key employee?
A key employee during 2000 is generally an employee who is any of the following.
- An officer having, for any year listed below, annual pay of more than the listed amount.
- 1996 -- $60,000
- 1997 -- $62,500
- 1998 -- $65,000
- 1999 -- $65,000
- 2000 -- $67,500
- A person who, for 2000 or any of the 4 preceding years, was any of the following.
- One of the 10 employees having annual pay of more than $30,000 and owning the largest interests in your business.
- A 5% owner of your business.
- A 1% owner of your business whose annual pay was more than $150,000.
To determine ownership in (2) above, treat your employee as owning both his or her own interest and any related person's interest. The term related person includes the employee's spouse, children, grandchildren, and parents. It also includes any corporations, partnerships, estates, or trusts in which the employee has at least a 5% interest.
Q. What are the record keeping requirements for a cafeteria plan?
- The number of your employees.
- The number of your employees eligible to participate in the plan.
- The number of your employees participating in the plan.
- The total cost of the plan during the year.
- Your name, address, and taxpayer identifying number (TIN).
- The type of business in which you are engaged.
You will need these records to file Form 5500 after the end of the plan year.