Is a Flexible Benefit Plan right for our company?

Questions & Answers

from Benefits Design Group, Inc.

What is a Flexible Benefit Plan?

A Flexible Benefit Plan ("the Plan"), often referred to as a "Cafeteria Plan," is a pre-tax payroll deduction plan that allows employees to set aside dollars for eligible insurance, medical, dental, optical, and daycare expenses before Federal, State*, and Social Security taxes are applied. The net effect is that your employees pay less payroll taxes and are able to keep more of their income. And, since you match your employees' Social Security tax, you too, pay less tax.  (* Not applicable in all states.)

The bottom line is that a Flexible Benefit Plan is a great way to help your employees maximize their spendable income while reducing your payroll tax burden.

Beyond payroll tax savings, are there other advantages to my company?

Absolutely. Some of the benefits are:

• Your existing relationships with insurance carriers or benefit providers are not affected in any way. The Plan can be installed at any time, regardless of insurance plan year renewals or fiscal years.
• Cost sharing of health insurance premiums. With the skyrocketing costs of health insurance premiums, more and more employers are looking to their employees to share in these costs. The Plan allows you to lessen the impact on take home pay when you shift certain premium expenses to your employees on a tax preferred basis.
• Facilitating your employee benefit goals. The Plan allows you to fully implement and better manage employee benefits, no matter the size of your organization. Participation may be extended to both full-time and part-time employees. Your tax savings can be reinvested in other benefits or directed to other business needs.
• Full service administration. We handle all of the documentation, reporting, and reimbursements for you. We provide your payroll department with a complete report that includes all of the employee elected salary reductions. We handle all of the processing and verification of claims and provide periodic account statements all as part of our standard service. To better serve your needs we have two different service options available, which gives employers the opportunity to tailor the funding and reimbursement arrangements to best fit your company's needs. (See comparison chart of service options)
• Medical Flexible Spending Account requirements and accounting. Under the IRS uniform coverage rules, the General-Purpose Medical or Limited-Puporse Medical Flexible Spending Account must be funded by the employer up to the amount of the employee's annual election upon presentation of eligible claims by the employee. The employer is required to be "At Risk" for any amounts in excess of the employee's current account balance. If the employee terminates prior to the end of the plan year, the employer cannot seek repayment from the employee. As part of our standard service, all accounts are maintained and tracked on a daily basis for any "At Risk" claims. Both service options include a protection feature that limits the out-of-pocket exposure to a plan year deductible. The deductible is determined by the maximum plan limit defined by the employer.
• Increased employee morale. Good employees are hard to find. The Plan helps you to attract and retain good people.

Will my employees like Flexible Benefits?

Absolutely!  Flexible Benefits are one of the few ways that employees can save money on medical, dental, optical, and dependent care expenses.

The following are some of the ways Benefits Design Group, Inc. makes participation simple!

• Prompt reimbursement processing. Depending upon the service option selected, checks may be issued weekly, semi-monthly, or monthly. Checks may be sent directly to the employee homes, to your office for distribution, or directly deposited into employee bank accounts where available.
• Pre-tax payment of insurance premium contributions. Employee contributions to premiums for employer sponsored insurance plans may be paid with pre-tax dollars. In fact, even individually owned medical or medically-related premiums are eligible under the Individual Premium Flexible Spending Account.
• Expands financial planning options. Your employees will be able to direct their increased spendable income into investment vehicles such as your company's retirement plan or a personal savings program. They will gain valuable insights into how they can better analyze the purchase of benefits and how selecting the right benefits can help them achieve their financial goals.
• Unsurpassed "two" way communication. Right from the start, we will provide detailed information to assist your employees in making the best possible enrollment decision. Periodic account statements include election information, year-to-date claims activity, account balances, as well as a reminder of plan year dates and forfeiture deadlines. Employees also receive detailed account activity on each reimbursement check stub. Customer service is readily accessible for participant inquiries. A toll-free phone number is available for participants to use during our regular business hours and Internet access to account information is available 24 hours a day, seven days a week, for those who want up-to-the-minute status of their accounts.

Service Option Comparison	Option 1	Option 2
Plan Document	Yes	Yes
Summary Plan Description	Yes	Yes
Anti-Discrimination Testing	Yes	Yes
At Risk Protection	Yes	Yes
BDG Account	Yes	No
Employer Bank Account	No	Yes
Reimbursement Frequency	Weekly	Variable
Daily Claims Processing	Yes	Yes
5500 Preparation (if applicable)	Yes	Yes
Employee Meetings (group and individual)	Yes	Yes
Employee Account Statements	Yes	Yes
Employer Account Statements	Yes	Yes
Direct Deposit	Yes	No
Internet Access to Account Information	Yes	Yes
Electronic Enrollment (some restrictions apply)	Yes	Yes

How does the plan actually work?

During Plan installation and each Plan Year thereafter, your employees choose which of the pre-tax benefit options apply to them. An employee can design their benefit program based upon specific needs and expenses each Plan Year. Some of the tax savings options are as follows:

• Employee contributions to employer sponsored group insurance premiums
  (Health, Disability/Accident, Dental, Term-Life, Cancer, Vision, etc.)  

• General-Purpose Medical FSA
  Any out-of-pocket medical, dental, or optical expenses not paid by insurance. Unlike itemized income tax deductions, a participant does not have to incur expenses that exceed 7.5% of their income before they are entitled to a tax savings. Examples of eligible expenses include deductibles, co-pays, prescription medications, hearing exams and hearing aids, prescription eyeglasses, contact lenses and solutions, orthodontia, vision correction procedures, medical mileage, dental expenses, and many more.  

• Limited-Purpose Medical FSA
  Any out-of-pocket dental or optical expenses only, that are not paid by insurance.  This account is Health Savings Account (HSA) compatible.  Unlike itemized income tax deductions, a participant does not have to incur expenses that exceed 7.5% of their income before they are entitled to a tax savings. Examples of eligible expenses include teeth cleaning, crowns, bridges, fillings, orthodontia, laser eye surgery, contacts, contact lens solutions, prescription eyeglasses, prescription sunglasses, eye exams, etc.

• Dependent Care FSA
  Expenses incurred for the care of eligible dependents for the time the employee (and spouse, if applicable) are at work. Examples include daycare, latch key programs, daycamp, and preschool.

• Individual Premium FSA
  An employee may purchase a medical or medical related policy through an independent arrangement with an insurance carrier. The employee must own the policy and file substantiated claims for reimbursement. Eligible premiums include health, dental, disability, optical, medicare supplement, accident, hospital indemnity, intensive care, and cancer insurance.  

• Health Savings Accounts(HSA)                                                          Any taxpayer can set aside dollars in a HSA if they have a qualified high deductible health plan (HDHP).  If the deductible meets minimum criteria, you are able to deposit dollars into a HSA bank account.  A tax deduction is available for deposits made to the account (up to statutory limits) without regard to whether or not you have incurred medical expenses for the year.  You can make tax free withdrawals if tied to qualified medical expenses.  Each taxpayer is expected to keep their own records in the event of an audit.  If the taxpayer withdraws funds for non-medical reasons, the amount is subject to a 20% penalty (beginning in 2011) and will need to claim the amount as income.   It is possible to run HSA contributions through the Section 125 plan as pre-tax payroll deductions.  Employers that withhold dollars from employee payroll will need to forward the amounts on the HSA account.  HSA withheld under Section 125 can take HSA dollars out before federal and FICA and Medicare taxes.  Most states also allow the amounts to be withheld tax free.  Check with your state to determine the tax deductible status. Employers can also contribute to employee HSA under the Section 125 plan.  HSA contributions made by employers under the Section 125 plan will avoid the HSA comparability rules.  HSA contributions are still subject to discrimination testing. 

For more information on HSAs Click Here HSA Brochure

Lets look at an example of an employee who earns $1,600 per month, lives in Minnesota, and is married claiming 0 exemptions:

As you can see, the result is an increase of $70.98 in spendable income each and every month.

For every dollar your employees set aside before taxes, you will save the matching Social Security tax as well. Imagine the impact to your company's bottom line! Based upon the previous example, the tax savings to your company will be $22.57 each month. Factoring in the size of your work force gives you an even better picture of the increase in cash flow your company could experience.

What is the cost of implementation and administration of the plan?

Surprisingly inexpensive! Using our example of an employee earning $1,600 per month, an employer will spend less than half of one percent (.5%) of an employee's salary the first year. The payroll tax savings you will experience in the first full plan year will offset the plan expenses and increase your cash flow in the process! The plan pays for itself and provides you the opportunity to increase your bottom line.

There must be some drawbacks to the plan. What are they?

There are virtually none. However, there are several specific plan requirements:

• "Use-Or-Lose." The IRS regulations require that any balances remaining in the Flexible Spending Accounts at the close of the plan year be forfeited to the employer.  Generally the plan will use any forfeitures to defray administrative expenses to implement and maintain the plan. The funds cannot be returned to the employees who failed to use their unclaimed account balances. Participants will receive benefit statements in the last quarter to alert them of account balances and claim filing deadlines.
• Annual Benefit Selection. According to the IRS regulations, employees may select pre-tax benefit options only once per year. The only opportunity to alter benefit choices and contribution amounts mid-plan year is in the event of a qualifying change of status. Qualifying events usually pertain to family and employment situations. A complete listing is available by contacting our office. Changes made to benefit elections must be consistent with the qualifying event and must be filed within the allotted time limit defined. (may vary by plan)
• Social Security benefit reductions. Participating in a Flexible Benefit Plan potentially reduces an employee's Social Security retirement and/or disability benefits. While the reduction is generally minimal, employees often choose to set aside a portion of their tax savings to invest in the company's retirement plan or in a private savings plan, which generally offsets the reduction.

What if I, or my employees, have questions along the way?

Of course, we are just a phone call or a click of the mouse away. If you or your employees have any questions about the enrollment process, reimbursements, or account status, you can contact us directly at our toll-free numbers 800-554-7213/800-342-8235 or visit our website www.bdgflex.com.

Who is Benefits Design Group, Inc.?

Benefits Design Group, Inc. is a third party administrator of Section 125 Flexible Benefit Plans. Our corporate headquarters and administrative center is located in Onalaska, WI and we have marketing support in both Minneapolis and Onalaska. We began designing employee benefit programs in June of 1987 and we currently assist over 1,800 employers nationwide ranging in size from as small as 2 to over 6,000 employees. Unlike most administrators, our primary focus is the marketing, implementation, and administration of Flexible Benefit Plans and other tax advantaged programs.

What are the Unique Advantages to using Benefit Design Group, Inc.?

• Expertise and Flexibility of Service Options
• Certified in Flexible Compensation Instruction
• Quarterly Newsletter
• Internet Access to Account Information
• At-Risk Indemnification Protection

If we missed any of your questions, or you would like to find out how to put the power of a Flexible Benefit Plan to work for your company, please contact us for a free estimate or to set up a meeting with one of our marketing representatives.