Is there anything good on the menu today for cafeteria plans? Yes, actually there is something new on the menu and everyone is going to enjoy it. A little known provision in the Patient Protection and Affordable Care Act of 2010 contains a section making cafeteria plans better than what they used to be for all firms with less than 100 employees.
Basics Behind the Cafeteria Plans
The “cafeteria plan” (otherwise known as the “flexible benefit plan” or “125 plan”) is simply an employee benefit plan that conforms to Section 125 of the Internal Revenue Code. Benefits can include health and accident insurance, adoption assistance, dependent care assistance, group term life insurance, and health savings accounts. The mechanics of the cafeteria plan works much like a cafeteria that serves food. An employee is issued a certain amount of money that can be used to purchase company offered benefits. The company then offers the employee a choice of benefits that the employee can spend the allocated amount of money on. Because employees’ needs vary by age, family status and situation, the employee chooses the benefits that further their individual goals the most. Either the employee can spend all of the allotted funds on various benefits, on some benefits, or even no benefits. Whatever benefits are not utilized may be lost. Any amounts above and beyond the benefits purchased by the employee must be paid directly by the employer in the form of a payroll deduction. In other cafeteria plans, the employees are not necessarily given an allowance, but are offered a direct payroll deduction.
The employee may then choose to spend their pre-tax money on benefits or take it as compensation. The money, in either type of an arrangement, is deducted from the employee’s pre-tax compensation, making the plans tax beneficial as well.
Due to the cost of healthcare and other benefits available under the cafeteria plan, cafeteria plans are widely used and employees enjoy the benefits. The Internal Revenue Code dictates the mandates of cafeteria plans. Among the mandate under Section 125, the plans cannot be top heavy benefitting only highly paid employees. Another significant limitation in the regular 125 Plan is that of the 2% owner. Generally the business owner cannot participate in the cafeteria plan.
Section 9022 of the New Healthcare Law (New Simple Cafeteria Plan)
To view the full text of Section 9022, please visit our website at www.taxplanning.com.
For tax years starting after December 31, 2010, Section 9022 of the PPACA applies giving rise to the Simple Cafeteria Plan. The most notable feature of the Simple Cafeteria Plan is a basic elimination of the top heavy rules for employees. To be an eligible employer, the employer must have had an average of less than 100 employees figured per day for the past two years. Employees must have worked at least 1000 hours for the past plan year. If the employee is under 21, or has worked less than one year, or has a collective bargaining agreement, or is not a citizen of the United States, such employees may be excluded form the plan. There are two contribution limits a plan must conform to. One is a uniform percentage of two percent of the employee’s income, or an amount which is not less than the lesser of six percent of the employee’s compensation for the plan year, or twice the amount of the salary reduction contributions of each qualified employee.
The benefit of this plan is that employers can open simple plans to their employees and also participate in the new plans without having the constant threat of their deduction being held in jeopardy by violating numerous rules including the top heavy rules.
Here, at The Center for Financial, Legal, and Tax Planning, we do not favor one piece of legislation over another, nor do we endorse any special treatment for those who enacted any and all legislation. Our task is to keep the public informed of what is available for use and what can benefit them the most in any given tax law, finance situation, or any law generally. Section 9022 is a hidden gem for any closely-held business owner and their employees.
By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors