Update on Hospital Cafeteria Plans 2014

Posted on August 12, 2014 by Dr. David Edward Marcinko MBA MEd CMP™

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Will that be Cash or Taxable Benefits?

[By Dr. David Edward Marcinko MBA]

Dr. DEMUnder hospital cafeteria plans, each eligible employee may choose to receive cash or taxable benefits, or, or an equivalent of qualified, non-taxable, fringe benefits. The amounts contributed by the employer are not taxable to the employee. In effect, the employee pays for the benefits with before-tax dollars.  They remain non-taxable even though the employee could have elected to receive those amounts in cash.

An additional benefit for both employee and employer is that nontaxable cafeteria plan benefits are not subject to FICA taxes, thus saving 7.65% on amounts that would otherwise be under the Social Security wage base.

However, if the employee does not use all of the monies that are diverted into the cafeteria plan, the unused amounts are forfeited.

The Essence 

The essence of a hospital cafeteria plan is that it permits each participating employee to choose among two or more benefits. In particular, the employee may “purchase” non-taxable benefits by forgoing taxable cash compensation.

This ability of participating employees, on an individual basis, to select benefits fitting their own needs, and to convert taxable compensation to non-taxable benefits, makes the cafeteria plan an attractive means of offering benefits to employees. Other qualified employee benefits, described above, are excluded from cafeteria plans.

Non-taxable benefits

Cafeteria plans may include the following non-taxable benefits:

  • 401 (k) retirement plan
  • health and accident insurance
  • adoption assistance
  • dependent care assistance
  • group term life insurance including premiums for coverage over $50,000.

Cafeteria plans and healthcare

It is always to the tax advantage of an employee to receive employer-provided health and accident benefits in a tax-free form, rather than paying them with after tax money. Note there is the potential drawback of employees thinking of health care benefits as an implicit condition of employment instead of true non-cash compensation.

Because of increases in healthcare costs, employers are not always willing or able to provide coverage for all of an employee’s medical expenses. This means many employees must often pay for a portion of their medical costs under a co-pay provision. If an employee is fortunate, the employer may establish a cafeteria plan to allow the employee to fund the co-pay healthcare costs with before-tax dollars.

Example:

For example, if an employee must spend $3,000 annually to provide healthcare coverage for his or her dependents, then the income-tax savings to the employee could be as much as $1129.50 annually, if the employee is in the 30% tax bracket ($900 in income taxes and $229.50 of FICA taxes). The employer saves $229.50, the 7.65% of gross pay “matching” FICA taxes.

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Hospital cafeteria plans

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Cafeteria plans and other nontaxable benefits

A cafeteria plan may be expanded to cover more than just medical benefits. It may offer participants a choice between one or more nontaxable benefits, and cash resulting from the employer’s contributions to the plan or the employee’s voluntary salary reduction. Participants in cafeteria plans are sometimes given a choice of using vacation days, selling them to the employer and then getting cash for them, or, buying additional vacation days. Some cafeteria plans also include one or more reimbursement accounts, often referred to as “flexible spending accounts” or “benefit banks.”

Under these plans, cash that is forgone by an employee, by means of a salary reduction agreement or other agreement, is credited to an account and drawn upon to reimburse the employee for uninsured medical or dental expenses, or for dependent-care expenses. Many cafeteria plans include both insurance coverage options and reimbursement accounts.

BOOK: Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

Conclusion

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