The Advantages of Having Flexible Benefits Programs
Flexible benefits programs, or cafeteria plans, can cut a company's benefits expenses and lower an employee's tax bill, but many businesses do not know this plan exists, according to Burton M. Goldfield of "Forbes." However, flexible plans have some disadvantages. The Internal Revenue Service (IRS) regulates most flexible benefit programs and instituting this kind of plan incurs extra administrative costs.
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Benefits to Employees
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Traditionally, employers have offered workers a predefined set of benefits. A cafeteria plan allows workers to choose from a list of benefits and pay for premiums with pretax dollars. This raises the employees' take-home pay because paying premiums with pretax dollars eliminates payroll taxes on those earnings. Without a cafeteria plan, the employee pays taxes and then reimburses the employer for premiums. The company can deduct premiums paid for employee flexible benefits programs.
Benefits to Employers
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Earned income that bypasses payroll taxes lowers your company's payroll too. Avoiding unemployment insurance and workers' compensation can save up to 20 cents for every dollar in wages paid to workers, according to "Entrepreneur." A flexible benefits plan also reduces the rise in insurance premiums. For example, say an employee's health insurance premium was $600 last year and rises 10 percent this year to $660. If your company pays $200 of that premium, the tax savings means an employee in the 25 percent tax bracket only pays (0.75 x $440) $330, or an extra $30 in premiums this year.
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Potential Benefit
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Your business may attract more talent because it can offer a wider array of benefits under a flexible program. Also, your company spends money on benefits more efficiently with a cafeteria plan than under a traditional benefits package. For example, a worker might already have health coverage under a spouse's plan, so health insurance gives the employee duplicate and unnecessary services. Alternatively, the employee can limit his benefits, especially if he is healthy, and divert those resources to a retirement plan or increase his paycheck.
Considerations
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Section 125 of IRS tax code requires certain duties on the employer's part. Your company must create a written plan with details such as the benefits you offer, annual limits and eligibility. Also, the company needs detailed records of when it pays benefits. Many businesses outsource their flexible benefits program to another company or the insurance company might offer administrative aid. If your company pays 100 percent of premiums for all benefits, there is no need for a flexible program.
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