What is a Full-Flex Cafeteria Plan?
There are several names for this type of plan: full flex, cafeteria plan, or Section 125 plan. As you may know, Section 125 refers to the section in the IRS rules that permit certain health benefits to be paid for with pre-tax dollars, but covers several options for employers who offer health benefits and use pre-tax dollars for payroll deductions. For more information on Section 125 plans and all the options available, click here.
Full-flex, or full cafeteria plans, enable an employer to create stipend for each employee to spend on a selection of benefits. If allowed by the employer, the employee can opt out of benefits, receiving the remaining amounts as taxable income.
Reasons to Consider a Full-Flex Option
An employer might want to establish a maximum cost per employee and offer the same benefit across the board to all employees while allowing them to choose options that fit their needs. Examples of employers who might be interested in reviewing this option include:
- If the employer has a large number of people who have access to other coverage, such as through a parent or spouse, the additional stipend could help pay for out-of-pocket costs or fund a flexible spending account instead of medical coverage.
- An employer with many employees covered by Medicare or Medicaid might find their employees prefer to have the cash-out option for additional income or buy benefits in full that make more sense for them such as dental or vision coverage with dependent care FSA and/or the cash out option. This could help differentiate one employer over another when competing for employees.
There are two downsides to a full-flex plan:
- The stipend amount is paid regardless of employee elections increasing employer cost if they currently have many employees opting out already without an incentive; and
- It may discourage lower-paid employees from participating in health coverage so they can access the cash-out.
In a full-flex plan, the monthly dollar amounts provided are often referred to as “flex credits” to purchase benefits offered within the cafeteria plan. This would include the following eligible pre-tax benefits:
- Accident or medical plan coverage
- Accidental death and dismemberment (AD&D) coverage
- Adoption assistance (FICA taxes still apply)
- Dental or vision
- Disability benefits (If pre-tax, benefits are taxable. If not pre-tax, benefits are not taxed.)
- Flexible spending accounts – dependent care and health care
- Health savings accounts
- Life insurance
- Supplemental policies (e.g., accident, critical illness, cancer supplemental policies)
- 401(k) contributions
The employer can choose the benefits that are offered and whether to offer a cash-out option. If a cash-out option is selected and the employer’s contributions exceed the cost of the benefits selected by the employee, then the employee may take the excess amount as additional taxable wages.
If the “flex credits” are not enough to cover the employee benefit elections, the employee can pay the extra cost with pre-tax contributions.
If you are interested in a cafeteria plan, contact your ARC client advisor today and we will help you decide if this is a good fit for your business.
References
Cafeteria Plan Compliance (Journal of Accountancy)
Compliance Overview: Section 125 Cafeteria Plans Overview (Zywave)