Cafeteria and Flex Plans for Small Business

Picking benefits from a menu keeps employees happy and benefits you, too

By Holly Ocasio Rizzo, Writer and editor, Holly Ocasio Rizzo

Employees enjoy the power of choice with cafeteria and flexible-spending benefits plans. They can pick from a menu of benefits and take home more pay because deductions for these plans are made before taxes are applied. Cafeteria plans, also called 125 plans because they're covered in Section 125 of the Internal Revenue Service Code, benefit your business in these ways:

They make your business more attractive to employees and can be a key to retaining workers.
They cost you nothing.
They save you money, because deductions that employees direct to cafeteria plans are generally not subject to payroll and unemployment taxes that your business pays.

Find plans and resources on the Web

Benefits consulting firms will design and run your cafeteria plan.
Try: Employee Benefit Resources and eflexgroup are two specialist firms in cafeteria and flexible-spending plans. The Employee Benefits Research Institute (EBRI) keeps you up to date on benefits trends and offers fundamentals of more than three dozen types of employee benefits. The American Benefits Council gives you comprehensive links to benefits providers.

Train your company's human-resources liaison

Employees need to make more decisions about managing benefits and that means more counseling by your HR team.
Try: The International Foundation of Employee Benefit Plans has an online certificate program for HR administrators. Section 125 training at HRTrainingCenter.com includes online courses for basic and detailed knowledge, as well as programs on new IRS rulings affecting cafeteria plans.

Let software point the way and keep the records

Handle payroll deductions, tax reporting and other financial requirements for your plans with specialized software.
Try: Core Documents Inc. sells a variety of software choices to assist with cafeteria plans. Downloadable PowerFlex software was designed specifically for managing flexible spending accounts.

File to the Internal Revenue Service.

The IRS sets forth rules for documentation under cafeteria plans. When in doubt, consult your tax lawyer.
Try: You'll want to check out frequently asked questions about cafeteria plans; Form 5500, a required IRS form for companies offering benefits plans; and IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits, covering highly compensated employees and shareholders of Subchapter S corporations.

Allowable benefits in cafeteria plans include flexible spending accounts for dependent care and health care reimbursement, and non-spending plans that let employees pay insurance premiums in group plan with pre-tax earnings or choose how to save for retirement.
Dependent care reimbursement accounts (DCRAs), used for tax-free care of children and other dependents, aren't as popular as other components. That's because employees must supply the provider's tax ID or Social Security number – a problem for those paying providers under the table.