You’d like to offer your employees more benefits than your group health insurance policy provides, but dental and vision care, life insurance, childcare, orthodontics, and more, would put a major dent in your budget. Or would they?
Thanks to Section 125 of the Internal Revenue Code, you can offer a flexible benefits plan and let employees pay for the benefits they want. Employees can pick and choose the benefits they need, beyond what is covered by your basic health insurance policy.
Besides choice, flex benefit plans offer another big plus: tax savings. Employees use pretax rather than after-tax dollars to pay medical premiums. Through payroll deductions, they designate a portion of their salaries to be set aside on a pretax basis to pay dependent care and out-of-pocket medical expenses. That means your employees’ taxable income is reduced and so are your firm’s payroll taxes.
Take these steps to set up a flexible benefit plan:
Decide what accounts you’ll offer
- A premium conversion account is the most basic option. You pay a percentage of your employee’s premium for group health insurance, the employee pays the rest
- With a dependent care account, employees can use pretax dollars for daycare for their children or adult dependents. Adults must be living with the employee, be listed as a dependent on the employee’s tax return, and attend a care center during the day. The IRS limits dependent care expenses to $5,000 a year for married individuals and $2,500 a year for single individuals
- With a medical expense reimbursement account, your employees can use pretax dollars for a variety of out-of-pocket medical expenses. These include dental care, orthodontia, eyeglasses, chiropractic treatment, and doctor-prescribed physical therapy. The IRS sets no maximum spending limit on this account but you can
- You might want to set restrictions to limit your liability in case your employee quits before the end of the year. Here’s why: Let’s say you hire an employee in January. He enrolls in your plan and elects to set aside $1,200 a year or $100 a month for out-of-pocket medical expenses. In February, he has a toothache, visits the dentist and leaves with a $700 bill for a root canal. A month later, he quits. Even though the employee put only $300 into his account, and then submits a bill for $700, it must be paid. You, the employer, will be responsible for the difference. The other side of this is that if the employee quits and leaves money in the account, it will belong to the employer. A third party usually administers these services and sends quarterly statements to the employee.
- Your insurance broker can explain how each account works, what paperwork is involved, and what expense you’ll incur with each account
Educate your employees
- If you decide to offer a flex benefit plan, the IRS requires full disclosure, which means you must give each employee a written plan description and hold an annual enrollment meeting, where employees either sign up or decline to participate.
- Your insurance broker can conduct your annual meeting, meet one-on-one with employees to answer questions, and enroll them in your plan.
Get help managing your plan
If you opt for flex spending accounts, you’ll need a software program to process claims, issue checks, maintain account balances, and meet IRS reporting requirements.
You can also hire a third-party administrator to set up and manage your plan. The administrator processes the claims, issues checks, maintains account balance, and meets other IRS reporting requirements.
- Ask your insurance broker or business associates for referrals.
- Or contact the Employer Council on Flexible Compensation, a Washington, D.C.-based lobbying organization on employee health programs.
Copyright 2000 PrintPlace.com, Inc. All rights reserved.
This article was last modified on January 6, 2023
This article was first published on June 1, 2000
Commenting is easier and faster when you're logged in!
