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@110 CHAP 8
┌───────────────────────────────────────────────┐
│ FLEXIBLE BENEFIT PLANS AND CAFETERIA PLANS │
└───────────────────────────────────────────────┘
FLEXIBLE SPENDING PLANS. An increasing popular type of tax-
favored employee benefit plan in the last few years is the
flexible spending plan, or "flex plan," which comes in at
least three flavors. Each of the flex plans described
below are designed to permit employees to choose how much
to spend on a tax-free basis for various employee benefits,
such as health care or dependent care. (NOTE: Flex plans
are for employees only, and cannot cover sole proprietors,
partners in a partnership, or 2% shareholders in an S
corporation.)
. PREMIUM-CONVERSION ACCOUNTS. This is the simplest
kind of flex account. It primarily is set up to allow
employees to pay for their share of health, disability
or group-term life insurance premiums with untaxed
dollars, by deducting specified amounts out of their
regular paychecks to pay for such coverage. Those
amounts the employees agree to have withheld from
their salaries or wages to pay such insurance premiums
are excluded from their taxable income (but deductible
by the corporation or unincorporated employer). Such
plans, in effect, convert part of wages directly into
insurance payments, without having the government
first remove a slice for taxes. Premium-conversion
accounts are practical for even the smallest compan-
ies, with only one or two employees.
. FLEXIBLE REIMBURSEMENT ACCOUNTS. These are accounts
an employee may agree to contribute a specified amount
to each year, under an employer plan, where the
employee gets to draw on the account to pay for health
care expenses not covered by the company (such as
medical insurance deductibles, vision care, dental
coverage, etc.) or for up to $5,000 a year for depend-
ent care expenses. Here's how these accounts work:
Before the start of each year, the employees must each
estimate their medical and dependent care (child-care
or elder-care) costs for the coming year that they
want paid out of their accounts. The amount designa-
ted by an employee is withheld from his or her pay-
check during the year (tax-free). As expenses are in-
curred during the year for health and dependent care,
the employee submits requests for reimbursement out of
the account to the plan administrator, up to the spec-
ified maximum. Employers may choose to supplement or
match amounts employees choose to have withheld from
their pay, as an additional tax-free benefit to the
employee.
Flexible reimbursement accounts may stand alone, or
may be combined with premium-conversion accounts.
They are feasible for fairly small employers, as well,
although administrative costs may tend to be greater
than for premium-conversion accounts.
. CAFETERIA PLANS. These are more complex plans, and
are rarely adopted by companies with fewer than 50
employees or so. Contrary to what you might infer
from the name, these plans have nothing to do with
setting up a company cafeteria. Instead, under a caf-
eteria plan, a company gives employees a cafeteria-
like "menu" of benefit choices, provides a fixed num-
ber of tax-free dollars per employee each year, and
allows the employees to each select or "buy" the
particular benefits desired, such as the following
typical choices:
. 401(k) plan contributions (where the employee is
offered a "cash or deferral" option with regard
to a portion of his or her pay);
. health insurance;
. life insurance;
. disability insurance;
. vision or dental care, or both;
. vacation time.
If the costs of the benefits selected exceeds the dol-
lar amount provided by the employer, the employee may
fund the balance with salary reduction amounts through
premium-conversion or reimbursement accounts, or both,
also on an untaxed basis.
Under flex plans, the golden rule is "use it or lose it."
Any amount in an employee's account that is not utilized
by the employee during the year is forfeited, and reverts
back to the employer at the end of the year. Note that
flex plans are required to meet nondiscrimination tests,
to ensure that highly compensated employees do not receive
a disproportionate share of the benefits provided. (I.R.C.
Sec. 125)
For more information on flex plans, contact:
Employers Council on Flexible Compensation
927 15th St. N.W., Suite 1000
Washington, D.C. 20005
(202) 659-4300