How to Set Up a Pre-tax Insurance Cafeteria Plan Benefit
Setting up and implementing a pre-tax insurance Section 125 Cafeteria Plan is fairly easy. Essentially, an employer needs to establish what type of plan that will provide the solution to their unique plan needs, set up the plan with proper documentation, notify & educate employees, and perform non-discrimination testing.
A Section 125 Cafeteria Plan is a very broad benefit. In simplest terms one may break down such a plan into three basic levels which include a Premium Only Plan (POP), Flexible Spending Accounts (FSA), and a full-blown Cafeteria Plan that uses "credits or benefit bucks" also referred to as a Consumer Driven Health Care (CDHC) or Defined Contribution (DC) Plan.
A Premium Only Plan (POP) allows for employees to pay their portion of the group insurance premium on a pre-tax basis and is a good start to saving taxes for you and your employees.
Taking your 125 plan to the next level includes implementing the Flexible Spending Accounts (FSA). Generally, there are two FSA accounts including a Medical FSA (medical / dental / vision) and a Dependent Daycare FSA. These FSA accounts will allow for the unreimbursed out-of-pocket expenses to be paid on a pre-tax basis. Examples include dependent daycare, office co-pays, prescription co-pays, eye exams, eyeglasses, contacts, orthodontics, etc…
A full-blown Cafeteria Plan / Consumer Driven Health Care (CDHC) plan that utilized "credits or benefit bucks" simply allows the employer to provide employees with a limited number of employer sponsored credits, which the employee then decides where they'd like to apply these credits within the menu of benefit options within the company's benefit program. Employees may then supplement with their own dollars to buy additional benefits or increase levels of coverage.
Partnering with a qualified Section 125 Cafeteria plan administrator will provide an up-to-date plan document and set up. Although note that not all documents and outsourced administration are equal. I hate to use a cliche, but "you get what you pay for".
For example, BPI - myCafeteriaPlan is a third party administrator that provides employers with documentation and ongoing outsourcing. Services you'd receive include:
Up-to-date Plan Document Summary Plan Description (SPD) master copy Corporate Resolution Customized Forms (enrollment, change of status, termination) Legal Review Attorney Opinion Letter Discrimination Testing Signature-ready Form 5500, if needed Powerful and easy-to-understand employee education
myCafeteriaPlan's documentation and plan set up incurs a one-time fee, as they do not charge a yearly renewal fee. Once an employer signs with myCafeteriaPlan, they will simply pay the ongoing cost of administration. Some administrators charge a flat fee while myCafeteriaPlan's ongoing administration is determined by the total number of participants, NOT accounts. As the number of participants increase, the cost per participant will decrease.
David Turner is Vice President at BusinessPlans, Inc. (BPI) - myCafeteriaPlan, which has been a third party administrator for over 14 years for pre-tax section 125 cafeteria FSA plans, section 105 healthcare reimbursement arrangements (HRA), and section 132 qualified transportation (Transit) plans. Visit www.myCafeteriaPlan.com
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