Use cafeteria plans to pay for healthcare with pre-tax dollars

Learn how employees can use pre-tax salary to pay for medical expenses, prescriptions, and even daycare.

We all want to lure quality employees, and one of the best ways to do that is to offer an attractive compensation package.

But it's the lucky small business that can afford comprehensive health care coverage. benefits such as health care coverage. Tack on extra amenities such as dental and vision insurance, and many find that it's out of the ballpark.

About Section 125 cafeteria plans

Fortunately, there are ways to provide your employees with a reasonable set of benefits without busting either one of your piggy banks, and may even save you a penny. The solution: Section 125 cafeteria plans.

Section 125 cafeteria plans allow your employees to pay for anything from health insurance premiums to dependent day care costs on a pre-tax basis.

You have choice too-choose a POP (premium-only plan) or an FSA (flexible spending account).

POP (Premium-only Plans)

Premium-only plans allow employees to deduct their share of the premiums they pay for company-provided benefits like health, dental, or life insurance from pre-tax wages.

While a POP does not offer employees any new benefits per se, it does provide much-welcomed tax relief for all concerned: employees pay less in taxes and therefore have a larger take-home pay.

In turn, companies are able to save 7.65 percent on FICA (social security) and Medicare taxes on the wages used to pay these premiums.

FSAs (Flexible Spending Accounts)

Flexible spending accounts take this pre-tax deduction concept one step further. These accounts provide employees with a pre-tax method to pay for medical expenses and/or dependent care that are not covered by their insurance.

Expenses that can fall under FSAs range from doctor co-payments and prescription drugs to contact lenses and dentist check-ups.

A flex spending account works by having an employee decide how much money they want to set aside for the year; this is then deducted evenly throughout the year.

The only mandatory limit is for child care, which is $5,000. However, you will probably want to place a limit on medical expense deductions to minimize your liability.

Otherwise, an employee who decides to make a medical pre-tax contribution of $7,000 can spend all that money on an operation in the beginning of January and quit work immediately -- leaving you with the responsibility of covering the amount not paid for by the employee's deductions.

Costs

A number of different companies can set up Section 125 plans including payroll services, insurance companies, third-party administrators and CPAs.

Expect to pay anywhere from $300 to $600-plus annually for a POP, and anywhere from $800 to several thousand dollars for an FSA.

While it is possible to set up a POP for your company yourself, it's not a great idea. If you don't keep up-to-date on compliance and filing issues, you can face non-compliance fines that set you back $100 per day.

Often, companies should find that their savings will more than offset the cost of administration.

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