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General Guidelines
Home » Insurance » Cafeteria Plans » General GuidelinesIf you choose to participate in a cafeteria plan, your employer cannot discriminate against you regardless of your income, share holdings or your spouse or dependent. The IRS has ruled that amounts cannot be carried over into subsequent years. If you have allocated $3,000 for medical expenses this year and you don't use all of that money, then you lose the money. The cafeteria plan cannot include long-term care insurance. The minimum contribution is $5.00 per paycheck which is $120 annually. If you are newly hired, you usually have 30 days in which to enroll. Payment is made to you only after payment has been made to the doctor or pharmacy and you have presented your receipts to your employer.
In Writing: Cafeteria plans must be in writing with certain provisions. It must include: a description of benefits, periods of coverage for each benefit, eligibility rules, provisions for contributions and the plan year.
Guidelines: Benefit allocations must be made prior to a period of coverage. The amount of money you decide to contribute cannot change unless there are certain changes made in the family status. The change in money must reflect the change in the family. You must estimate the costs you will incur during a plan year and then the money is taken from your salary and placed in your cafeteria plan allotment.
Benefits: Under some cafeteria plans, group life insurance, dependent care assistance, adoption assistance, vacation pay and cash may be a benefit. Scholarships, meals, lodging, long-term care insurance that is nontaxable and medical savings account are not provided as part of a cafeteria plan. If you elect to use a vacation day under the cafeteria plan, a participant can choose between additional vacation days or to cash it out. The benefits must be used before the end of the plan year. Cafeteria plans in some ways provides a means to partially exclude the government from your salary, legally! Cafeteria plans also can play children's day care expenses. Small business owners and their employees benefit from the cafeteria plan. It allows the owner to provide benefits that could otherwise not be available. The amount of money someone can save paying for medical expenses increases directly with the rate at which the person pays federal tax. There are also benefits to the employer. As employees reduce the amount that must be made to Social Security and Medicare, the taxes that must be made by the employer is reduced. If 12 employees elect to participate in a cafeteria plan and contribute $100 per month per employee, then the savings for the employer would exceed $1,100.
Repercussions: There a few negatives to a cafeteria plan. If you redirect your wages that would otherwise be taxed for Social Security, then you have slightly lower benefits at retirement. If you choose to use the daycare option, then the child care tax credit component of your income tax won't be available on your tax return. Once you decide to contribute to a cafeteria plan, you cannot change the amount unless there are emergency family situations. After deciding upon the amount, if you don't use it you lose it. Insurance premiums and childcare are easy to predict but out-of-the pocket medical expenses are harder to determine. The employer has some hassles with implementing cafeteria plans for it employees. There are administrative and bookkeeping concerns. The plans must be in writing, guidelines must be followed and plans must not be discriminatory. A tax return must be completed on the plan by the employer.
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