Chapter 11 - Cafeteria Plans and Flexible Spending Accounts (FSAs) Flashcards
Define a Cafeteria Plan.
Employees choose their benefits from options provided by the employer, including a cash option.
List the advantages (2 things) and disadvantages (2 things) of the Cafeteria Plan.
Advantages:
- Employees appreciate the value of their benefits.
- Helps control employer costs by eliminating unnecessary benefits.
Disadvantages:
- Complex and expensive to design and administer.
- Highly compensated employees may lose tax benefits if the plan is discriminatory.
List the 3 tax implications associated with Cafeteria Plans.
Must comply with IRC Section 125.
If not compliant, benefits are taxed as income.
Nontaxable benefits for key employees must not exceed 25% of the total nontaxable benefits.
What are qualified benefits for cafeteria plans?
Options include accident and health benefits, dependent care services, group term life insurance, and health savings accounts (HSAs).
Non-eligible benefits: scholarships, educational assistance, employee discounts, and retirement benefits (except Section 401(k) plans).
Cafeteria plans have a ____ requirement, meaning that they must be available to a….
nondiscrimination
broad group of employees and not favor highly compensated employees in participation or benefits.
Detail 5 things about SIMPLE Cafeteria Plans for Small Businesses.
Available for employers with 100 or fewer employees.
All nonexcludible employees with at least 1,000 hours of service must be eligible.
Excludible employees: under 21, less than one year of service, covered under collective bargaining agreements, or nonresident aliens.
Contribution requirements: uniform percentage (at least 2%) of compensation or the lesser of 6% of compensation or 200% of salary reduction contributions.
Exempt from typical nondiscrimination requirements if meeting eligibility, participation, and contribution criteria.
Define an FSA (2 things).
A cafeteria plan that allows employees to be reimbursed for qualified expenses.
Funded by voluntary pretax salary reductions and possibly employer contributions.
Detail the 2 types of FSAs.
Health FSAs: Maximum reimbursement of $3,200 for 2024, with additional employer contributions up to $500 or a dollar-for-dollar match.
Dependent Care FSAs: Annual salary reduction limit of $5,000 for married filing jointly or head of household.
Detail the 2 appropriate use cases for an FSA.
For expanding employee benefit choices without significant employer costs.
Ideal for employees with spouses having duplicate coverage, those contributing to health insurance costs, or those needing benefits difficult to provide on a group basis.
Regarding FSA benefits, self-employed persons or partners…
cannot receive FSA benefits.
What are the advantages (2) and disadvantages (5) of FSAs?
Advantages:
- Funded through employee salary reductions, with no extra outlay for the employer except administrative costs.
- May provide more tax savings than using the child and dependent care credit.
Disadvantages:
- Must meet complex nondiscrimination requirements.
- Requires employees to estimate benefit needs and file timely election forms.
- Risk of adverse selection, increased benefit costs, and higher administrative costs.
- Unused contributions may be forfeited.
- Long-term care services or coverage and over-the-counter medications (other than insulin) cannot be reimbursed tax-free.
What are 3 tax implications of FSAs?
Salary reductions for nontaxable benefits are not subject to income or payroll tax.
Employer receives a tax deduction for amounts paid.
Employer’s payroll subject to payroll taxes is reduced by the amount of employee salary reductions.
