How does a Premium Only Plan (P.O.P) work? How does a Flexible Spending Account Plan work?
When was the last time you, as the Employer, were able to provide your employees an appreciable increase in take-home pay without increasing costs . . .and actually save money?
A Section 125 Cafeteria Plan is a written benefit plan maintained by a company for the benefit of its employees. The plan participants are allowed to choose among two or more benefits consisting of cash or nontaxable benefits.
A Cafeteria Plan offers the participant the option to pay the employee portion of qualified nontaxable benefits with before-tax dollars by salary reduction rather than with after-tax dollars through payroll deductions. When payments are made with pre-tax dollars, a participant's take-home pay will increase since gross taxable wages are reduced by the payment, thereby decreasing the tax liability.
A POP Only Cafeteria Plan allow employees the opportunity to pay for qualified insurance premiums with pre-tax dollars, thus avoiding taxes. Click here to view how a POP plan works for you and your employees.
An FSA Cafeteria Plan is a Section 125 Cafeteria Plan with a Premium Reduction Option (POP Plan) plus Flexible Spending Accounts. Click here for examples of how an FSA plan could work for you. You may hear this referred to as full-flex plans or flexible benefits plans. (The term Section 125 refers to the section of the Internal Revenue Code specifically pertaining to Cafeteria Plans.)
Qualified Nontaxable Benefits include group and individual health or accident insurance, group term life insurance up to $50,000, disability benefits, and flexible spending accounts. Flexible Spending Accounts include out-of-pocket medical, dependent care, and premiums for a personally owned health policy.
Complete the Employer Savings Worksheet below to see the effects a Cafeteria Plan can have on your company's bottom line.
Employer Savings Worksheet:
1. Estimated number of employees participating 53 ______
2. Times Estimated Average monthly employee
contributions for their medical, dental and other
health insurance $100 _______
3. Times Employer FICA contribution percentage 7.65% 7.65%
4. Equals Employer’s Estimated Savings per month $405 _______
5. Employer’s Estimated Annual Savings $4,860 _______ More Payroll Efficiency:
Estimated Employee Incremental Tax Rate
Federal Income Tax 18.00% _____% State Income Tax 5.00% _____% FICA Tax 7.65% 7.65%
6. Estimated Employee Incremental Income
Tax Rate: 30.66% ______%
7. Total Pre-tax Employee Contributions $63,600 $_________ (Line 1 X Line 2 X Twelve)
8. Employer’s Estimated Increased
Payroll Efficiency $91,792 $_________
(Line 7) / (100.00 – line 6) or ($63,600) / (100.00 – 30.66)
In the example above, the Employer saves $4,860 in payroll taxes each year while at the same time the Employer gets $91,792 more efficient use of the payrolldollars already being spent. In other words, without the Plan, the Employer would have to increase Gross Pay by $91,792 in order to match the employees’ increased take-home pay provided under the Plan.