FLEXIBLE BENEFIT PLANS
FOR THE SMALLER ORGANIZATION
By
John W. Guarniere, SPHR
RCE Associates
UNDERSTANDING AND MEETING
BENEFIT NEEDS
With employee benefit costs reaching all-time record levels, it is more expensive today than ever before to provide quality benefits that meet the personal, financial and security needs of employees. On the average, companies spend $3,200 per year and employees contribute 30% of that premium. Premium costs have increased more than 100% in the last 5 years and these increases are expected to continue this upward spiral. The Research Institute of America estimates that in the year 2000, the cost of health care per employee will be $22,000!
Even if you only have one employee, it is time to implement a Cafeteria Plan. Fortunately, today's manpower and administrative requirements have been reduced to a minimum and return on investment is more than worthwhile. In most cases, the costs of installing a Cafeteria Plan is returned within 3 months or less.
WHAT IS A FLEXIBLE BENEFIT
PLAN?
A Flexible Benefit Plan is an IRS sanctioned arrangement whereby employees may choose from a "menu" of benefit alternatives and pay for certain employee benefits with pre-tax dollars.. The employee's contributions for benefits become pre-tax salary reductions, rather than after-tax deductions. The amount of the salary reductions is not considered~ "earned income" by the IRS and is not reported on the employee's W-2 form.
Cafeteria Plans were created by Congress in the Revenue Act of 1978. The Act called for the addition of Code Section 125 to the Internal Revenue Code as a result of changes in the work force and the rising costs of health benefits. The Section was designed to help make employee benefits programs more affordable and flexible. The rules were clarified in 1986.
Flexible Benefit Plans can be simple POP's (Premium only Plans) in that the cafeteria plan does not have to be designed with a core of basic benefits and a myriad of options that can be added to it, at different costs and tax cons iderations. The administration of the plan is infinitely simpler than a multifaceted cafeteria plan. The employee's option, is to take benefits on a pre-tax basis only.
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Section 125 creates opportunities for both the employer and employee:
Employees can reduce income taxes ; Employers can experience related payroll tax reduction.
Employees are provided with benefit choices. Additional Spendable Income new benefits can be offered, Increase in most of which are available on a tax-favored basis.
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PREMIUM CONVERSION IN ACTION
Premium conversion is changing the accounting procedure for taxing employee paid health care premiums.
Premium conversion may be implemented as a first-step entry into Section 125.
The premium conversion program provides employees the opportunity to pay their share of insurance premiums for qualified benefits through a payroll reduction using before-tax dollars. The easiest way to understand the advantages gained by employees is to examine this program in action.
Assume an employee is paying $20 weekly through a payroll deduction to cover his family premium under his employer's group medical plan.
Under a premium conversion, Section 125 program, the employee is able to pay that $20- weekly with before-tax, rather than with after-tax, dollars.
Here's whats happening annually:
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W/O Conversion
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With Conversion
|
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Gross Pay
|
26,000
|
26,000
|
|
Before-Tax Insurance Premium Payroll Reduction
|
0
|
1,040
|
|
Taxable Gross Pay
|
26,000
|
24,950
|
|
Federal & State Taxes
|
6,136
|
5,824
|
|
FICA Payments (7.65%)
|
1,989
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1,909
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|
Net-Pay
|
17,875
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17,875
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After-Tax Payment of Insurance Premium
|
1,040
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0
|
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Spendable Income
|
16,835
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17,227
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Increase in Spendable Income
|
|
392
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USING THE FLEXIBLE SPENDING ACCOUNT PROGRAM
The use of flexible spending accounts enables employees to further increase their "benefit buying power" by setting aside before-tax dollars:
A medical reimbursement account can be used to pay almost any genuine~ medical expense not covered by a group plan. Dental, vision, plan deductibles - all qualify as reimbursable medical expenses. One (i) out of (3) employees use Medical FSA's and they average $600.00 a year!
A dependent care reimbursement account can also be used to pay the costs of dependent care that enable the employee to work. Dependent care may be for a child under age 13, or for care of a spouse or other adult dependent who is incapable of self-care, such as an invalid parent. One (i out of i0 employees use Dependent Care reimbursement account and they average $2900.00!
Assume a 15% tax bracket employee takes a total of $55.00 per week in before-tax reductions for these expenses:
$5 per week to pay expected family dental and vision expenses during the year.
$50 per week to pay child care expenses.
This illustration assumes an employee has filed for and received reimbursement from his accounts during the year.
|
|
W/O FSA
|
With FSA
|
|
Gross Pay
|
26,000
|
26,000
|
|
Before Tax Insurance Premium Payroll Reduction
|
0
|
2,860
|
|
Taxable Gross Pay
|
26,000
|
23,140
|
|
Federal & State Taxes
|
6,136
|
5,304
|
|
FICA Payment (7.65%)
|
1,989
|
1,909
|
|
Net Pay
|
17,875
|
16,066
|
|
Payment of Expenses
|
2,860
|
2,960
|
|
Employee Reimbursement from Spending Account
|
0
|
2,960
|
|
Net Spendable Income
|
15,015
|
16,066
|
|
Increase in Spendable Income
|
|
1,051
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EMPLOYER TAX SAVINGS
For employers, these two flexible spending accounts mean more than major improvements in employee benefits. They mean additional reductions in employer payroll taxes.
In fact, the greater the employee participation, the more employer payroll taxes are reduce. In most cases Unemployment and Workmen
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Compensation payments are reduced.
One (i) installation saved a clients $4500.00 annually on FICA payments alone (40 employees x $1,500 employer paid premium x 7.65 paid toward FICA) . Additionally, employees, took another $500 in their Flexible Spending Accounts and contribute another $1,500 to employer savings.
For a $2,000 investment our client saves $6,000 in year one and employees saved $18,000 collectively.
FULL FLEXIBLE PLAN
A recent installation provided an excellent return on investment for a 60-person consulting firm. In addition to saving our client $80,000 annually by having us shop the health care coverage employees now have a full flexible plan that enables thiese guys to select from a $3,500 annual allowance. Employees will have 4* required purchases and 8 options. Regardless of marital status, employees will be entitled to the following:
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Employee
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Family
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*Health Care-Employee
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Must
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and/or married
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Optional
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*Dental for Employee
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Must
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Dental Married
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Optional
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Health Maintenance Organization
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Optional
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Flexible Spending Account Medical
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Optional
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Flexible Spending Account Dependent Care
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Optional
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*Life/AD&D 1 x salary
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Must
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Life/AD&D additional
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Optional
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Life/AD&D dependent
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Optional
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*Long Term Disability Basic Plan
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Must
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Long Term Disability Enriched Plan
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Must
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Cash 50% of cost (all or part)
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optional
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Future employee benefit options could include:
- Extra vacation days*
- 401K* Savings Plan
- Legal Services
- Supplemental retirement plan*
- Dental-Preferred Provider Organization
- Dental/Self Funded
- Long Term Care* (not pre-
taxed)
Fortunately, insurance carriers are just starting to recognize the demand for products that can be added to these programs. Participation requirements are the major drawbacks to Flexible Benefit Plans to date. Employees need individual products offered on a group basis and carriers are just starting to listen.
Another barrier that now makes full flexible plans viable for a smaller companies is the availability of software packages. For as little as $295, companies with 50 or less employees can both administer claims and accounts and also do the necessary discrimination testing.
The key tasks for implementing a full flexible plan include:
Establishing corporate objectives
Determining employee needs
Designing the appropriate game plan
Re-allocating employee benefit funds
Communicating the plan to employees
Insuring for all legalities
Selecting the appropriate software and/or accounting procedures
CLOSING
The options available to the small business organization are infinite. Employee benefits never offered before can now become possible for the smaller company. If the employee wants salary only, fine! If not, he buys his benefits through salary reduction which, is subsidized by reduced Federal, FICA taxes and sometimes State taxes. Employees typically save three to five times that of the employer! It is a win/win situation for a11!
Even part-timers that need employee benefits can now buy benefits, but not at the expense of increasing payroll. Duplicate benefits no longer have to be given to all employees when the spouse is already covered in another organization. The options and benefits available are unlimited !
John W. Guarniere, SPHR is President and founder of RCE Associates, Employee Benefit Consultants, specializing in Flexible Benefit Plans for small-medium organizations.
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Published in the Mercer Business Magazine
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