Planning the design of any plan is essential to the success of the program.  There are many factors an employer should consider when making these decisions, including

• Employee Demographics
• Coordination with Other Benefit Programs
• Cost of the Program
• Communication to Participants
• Responsibility for Plan Administration
• How to Ensure Compliance with Regulations

These details should be explored completely before implementing any benefit plan.

A cafeteria plan can be funded by employee salary deferrals, from employer contributions or a combination of both.  Employee deferrals made to pay insurance premiums or fund other benefits such as unreimbursed medical or dependent care assistance plans benefit both the employee and employer.  When the plan is funded with pre-tax dollars, employees are not required to pay federal income or FICA taxes on the amount.  Certain states also eliminate payroll taxes on Cafeteria Plan deferrals.  Since the employee does not have FICA taxable income, the employer also saves the amount that would have been paid on the matching FICA contributions.

There are several options that can be included in a Cafeteria Plan.  They can be as simple as a premium only program or a full flex plan that covers a number of benefit options.

Premium Only Plans.  Generally, insurance costs paid by an employee through payroll deduction are applied after taxes are withheld from the individual’s wages.  With a Section 125 or Cafeteria Plan, certain premiums can be paid before taxes are withheld, providing more take-home cash for the participant. Premiums for major medical benefits, dental and vision programs are examples of plans that can be covered under the Cafeteria Plan.

Unreimbursed Medical Plans.  Many employers permit employees to defer a portion of their compensation and apply those monies to an account used to pay expenses not covered by the employer’s major medical account.  These accounts are also known as flexible spending accounts or FSAs.  Funds are withheld from the employee’s salary on a pre-tax basis and the employee is permitted to make withdrawals as qualifying medical expenses are applied.  Expenses such as over-the-counter medicines and expenses not generally covered by standard major medical plans may be paid from a health FSA.

Generally, a participant must enroll for a specific period of coverage, defined as a 12-month period.  In 2001, IRS issued final regulations on the change in status rules that permitted significant changes in these, making it easier for employees to make a change to their elections.  Employees are now permitted to change elections due to Health Insurance Portability and Accountability Act of 1996 (HIPAA) special enrollment events; Medicare or Medicaid enrollment (or rescinded enrollment); a judgment, decree or order requiring health coverage for a dependent; certain significant cost and coverage changes; and special requirements under the Family Medical Leave Act.  The rules also permit certain changes in the premiums paid under the plan, assuming the change is consistent with the event. The IRS position that health coverage may be dropped only when it is picked up elsewhere remains a requirement under the new regulations.

A Health Reimbursement Arrangement is a program established by the employer and funded with employer contributions.  The plan is designed to pay expenses not covered by another health plan. Unlike an Unreimbursed Medical Expense Account, the funds in a HRA can be remain in the account from year to year. An HRA funded by employer contributions is controlled by the employer.  This permits an employer to retain any amount in the account in case the employee terminates employment.  In addition, the employer is not required to fund the plan until expenses are actually claimed by the employee.

Employees who participate in a Cafeteria Plan elect to pay for certain benefits on a pre-tax basis.  An employee may elect to pay for payroll-deducted medical premiums on a pre-tax basis.  The tax savings can then be used to pay for additional costs such as deductibles and co-payments.

Employees may also be able to defer pre-tax salary into spending accounts that provide for reimbursement of certain medical and dependent care expenses.  By understanding and using this benefit in conjunction with other benefit programs offered by the employer, the employee can make the most cost effective decisions available to select a benefit program most suited to their needs.

That question can only be answered after considering the benefits available through the employer’s plan. For example, if the employer offers an HRA or a high deductible health care plan, the employee may be better served to utilize one of those options rather than the medical FSA.  However, depending on the tax bracket of the employee, the Dependent Care FSA may be more advantageous.  There are many considerations to make before making an election to participate in the Cafeteria Plan.

Generally, employers provide educational meetings and materials prior to offering a plan to employees. The regulations that apply these plans are complex and the employer may select various provisions to include or exclude from the Plan.  As a result, the employee should learn about and understand the program before making an election to make salary deferrals.

Section 125 Plans must contain a provision that requires a participant to use the funds applied to their account by a specific date or forfeit those funds.  Once the grace period for the plan has expired, any remaining amounts may not be used by the individual participant for expenses incurred in a future period. Because of these rules, employees are encouraged to plan carefully in calculating deferrals into the plan.

Employees are permitted to enroll in the plan based on the provisions of the plan document.  Some programs impose a waiting period before new employees are permitted to enroll, while other employers permit entry into the program upon employment.

The method for enrolling in the plan is also differs with employers.  Enrolling through a web site may be an option under some programs, while completing required forms may the method utilized by another employer.

How do I receive Reimbursement from the Plan?

Each plan provides a different method for receiving reimbursement.  In some cases, plans offer participants a debit card that can be when purchasing medications or paying for doctor visits.

Can I cover the medical expenses for my children under my Plan?

Your child’s expenses can be covered as long as they qualify as your dependent.

What expenses should be considered for a medical reimbursement account?

When calculating the amount to defer into a Medical Reimbursement Account, the following items should be considered:

• Over the Counter Medications
• Out-of-Pocket Deductibles you pay
• Co-payments you are required to pay
• Medical Expenses not covered by your insured plans
• Medical and dental expenses for your dependents
• Vision costs

How frequently can I change my elections under the Plan?

Generally, you can change you deferral elections annually, unless you incur a change in status, as defined in IRS regulations. A change in status can include changes such as:

• Marriage or divorce
• Birth, adoption or death of a child
• Certain change in benefit options available to the spouse
• Death of a spouse