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Cafeteria Health Insurance Plans

Cafeteria health insurance plans allow a company's employees to determine where they are going to spend their healthcare dollars. In a similar way to choosing what you want to eat at a cafeteria, employee select the health insurance plans and benefits they want from a basket of available options. Section 125 of the Internal Revenue Code is the legislation governing cafeteria style group health insurance plans.

Cafeteria Health Insurance Plans: Section 125 Of The Internal Revenue Code

Section 125 of the Internal Revenue Code allows employees to designate that a certain portion of their salary be withheld to pay for:

  1. Medical, Dental, and Vision Expenses

  2. Premiums for Medical Insurance, Accident, or Disability Insurance

  3. Term Life Insurance (Group Plan)

  4. Legal Services (Offered Through a Group Plan)

  5. Expenses Associated with Caring for Dependents, including Day Care Expenses

Cafeteria Health Insurance Plans: Flexible Spending Accounts

Employers can structure a cafeteria health insurance plan that offers employees a spending account that can be used to pay for medical expenses that are not covered by other health insurance plan or program to pay for the care of dependents.

Cafeteria Health Insurance Plans: Employer Contributions

The employer portion of a cafeteria plan is set out in an agreement between the employer and the employee. The employee agrees that a portion of his or her salary will be put into the cafeteria health insurance plan. Since the agreed-upon amount is never actually received by the employee, it is not included in his or her income for tax purposes.

Cafeteria Health Insurance Plans: Advantages For Employers and Employees

For Employers: Employers benefit from a cafeteria health insurance plan because employee incomes are reduced for income tax purposes, and the employer pays less in payroll taxes as a result. In addition, the employer's FICA taxes (7.65%) are eliminated. Depending on the state where the business is located, the employer may also save on workers' compensation premiums. Employers have the flexibility to offer employees a cash salary or their choice of non-taxable benefits from a list of options.

For Employees: The employer is able to offer benefits to employees that would not be affordable otherwise. Any money that the employee designates for a cafeteria health insurance plan is not taxed at either federal or state levels. This means that the employee's taxable income goes down and his or her take-home pay increases.

Cafeteria Health Insurance Plans: Disadvantages

Employees need to understand that when they choose to enroll in a cafeteria plan for their health insurance, the amount of money subject to deductions for Social Security is lower. As a result, the employee may receive a lower level of Social Security benefits after they retire.

Here's another situation where the employee needs to be aware of the consequences of enrolling in a cafeteria health insurance plan: If the employee is paying for day care costs from a plan for dependent care. When that person prepares his or her income tax return, they will not be able to claim a credit for child care costs.

The decision to designate a certain portion of the employee's wages toward a cafeteria health insurance plan should be a well-considered one: once the papers are signed, the decision is irrevocable unless the employee's marital status changes, the number of employee dependents changes, or the employee's spouse becomes unemployed.

The employee needs to be able to accurately foresee how much they will be spending for healthcare each year. Any funds remaining in the plan at the end of the year are forfeit; they don't roll over to the following year. Some costs for healthcare are fixed and the employee will know in advance how much they will be spending on daycare costs or health insurance premiums. The employer should employees counseling to help them determine how much they will be spending on their healthcare needs throughout the year.

When an employer offers a cafeteria health insurance plan, an annual income tax return needs to be filed for the plan. The Form 5500 is only filed for information purposes, but the employer will face severe consequences if it is not filed correctly and on time.

Compare Group Health Insurance And Individual Health Insurance Plan Options Now!

You can discover more about cafeteria health insurance plans and traditional health insurance plans by clicking on the tool at the top of this page. Why don't you do that right now and get the information you need about this and other health insurance options?