1. what is a cafeteria benefits plan? A Cafeteria Benefits Plan allows employees to select various employee
benefits to match their specific needs. Under IRS Code Section "125", employees
may select certain benefits and pay for them on a pre-tax basis.
By participating in the Cafeteria Benefits Plan, employees will be able to
select from a list of qualified insurance premiums.
2. what is premium conversion? Premium conversion allows you to pay for certain employer-sponsored
insurance premiums with tax-free dollars. To do this, you simply elect to have
your insurance premiums deducted from your gross salary, before taxes are taken
out. Please refer to examples A and B to see how this works:
EXAMPLE A
You are single with no dependents/$2,000 gross monthly salary.
Without Cafeteria Benefits
With Cafeteria Benefits
$2,000.00
Gross Salary
$2,000.00
Gross Salary
-486.69
Federal, State, FICA
-52.92
Insurance Premiums
1,513.31
1,947.08
-52.92
Insurance Premiums
1,947.08
New Taxable Income
-465.04
Federal, State, FICA
1,460.39
Spendable Income
1,482.04
New Spendable Income
You receive an increase in take-home pay of $21.65
EXAMPLE B
You are married with two dependents/$2,500 gross monthly salary.
Without Cafeteria Benefits
With Cafeteria Benefits
$2,500.00
Gross Salary
$2,500.00
Gross Salary
-537.65
Federal, State, FICA
-133.14
Insurance Premiums
1,962.35
2,366.86
-133.14
Insurance Premiums
2,366.86
New Taxable Income
-501.06
Federal, State, FICA
1,829.21
Spendable Income
1,865.80
New Spendable Income
You receive an increase in take-home pay of $36.59
3. Is there any risk in pre-taxing
qualified insurance premiums? While participation in the premium conversion portion of the Plan can
save employees around 30% on their premiums, they may not change elections or
coverage during the Plan Year without a change in their family status. Examples
of status change would include, birth, death, marriage, divorce, adoption,
change in spouse employment, change in hours from part-time to full-time (or
vice-versa) or termination.
Unless you know of a change in your coverage that does not fall into one of the
above examples of a status change, then premium conversion will allow employees
tax relief on their qualified insurance premiums.
4. How does a cafeteria plan help
employees save money? By electing to pay for qualified insurance premiums on a pre-tax
basis, dollars are deducted for these elections and taxable payroll is reduced
before state, federal and FICA withholding are taken out.
5. How do irs regulations affect my
cafeteria benefits? Effective January 1, 1999, the IRS has made some changes to the
qualifying events which may allow you to make changes during the plan year. They
are all regarding the change in family status, and are listed below. These are
the only allowable changes, and are applicable to 1) your cancer policy premiums
and 2) your dental plan premiums.
• Change in an Employee's Legal Marital Status - including marriage, divorce,
death of a spouse, legal separation or annulment.
• Change in the Number of Tax Dependents -including birth, adoption or placement
for adoption or death.
• Termination or Commencement of Employment - by an employee, spouse or
dependent.
• Change in Work Schedule - would include a reduction or increase in hours by
the employee, spouse or dependent. This would also include a strike or lockout,
and commencement or return from an unpaid leave.
• Change in Dependent Eligibility - for health benefits because of attainment of
age or student status.
• Change in Residence or Worksite - of employee, spouse or dependent.
A change of family status event must fall into one of the six categories
resulting in a loss or gain of eligibility for a health plan. The change
resulting from the event must also comply with the "Consistency Rule". The
regulations limit the election changes so that they must be consistent with the
family status change event or a court order. Therefore, the status change must
result in the employee, spouse or dependent gaining or losing eligibility for
coverage. An employee may not be able to change an existing election unless it
reflects the loss or gain of that eligibility for coverage.
