Full Cafeteria Plans

EMPLOYER CONTRIBUTION (CREDIT) OR SALARY GROSS UP?

One of the greatest advantages of Section 125 plans is that they may be designed to complement the current benefit package while assisting the employer in shifting a portion of the costs of the benefits to the employees using pre-tax dollars. The employer has three options available in deciding the level of employer contribution to the plan. Those options are: 1) a limited employer contribution (credit) for each employee with or without a cash-out option; 2) a limited gross up of salary for each employee; or 3) no employer contribution at all (straight salary reduction as elected by each employee). Each of these options is acceptable provided all employees are treated in a non-discriminatory manner.

In deciding which option is best, the employer needs to consider the ultimate objective they wish to achieve. Under Option 1 (Credit), the employer is ultimately trying to assist the employee by making funds available in the FSAs for their use throughout the plan year with no tax consequences. Under Option 2 (Gross Up), the employer is assisting the employee by giving them a salary increase equal to a certain amount to compensate for the cost of benefits; the increase does not have to be used in the plan, and there are tax consequences to the employer and potentially the employee. Under Option 3, the employer is providing the employee the ability to pre-tax their expenses up to the employee's elected amount. The following summarize the advantages and disadvantages of both forms of employer contribution. The perspective is from both the employee side as well as the employer side.

• Can offer "cash-out" if benefits chosen are less than "flex credits"
  • Can limit the "cash-out" amount (i.e. 50¢ of $1 unused credits - up to max of $250)
  • Cash out is taxable to employee
  • Could violate insurance company minimum participation rules
• Can require employees to purchase "core" coverage or prove coverage elsewhere

• Various benefits are packaged together
• Ease of administration
• Minimizes adverse selection
• Least flexible for employees

• All employees get basic level of coverage (typically health)
• Some protection from adverse selection
• Some flexibility in benefit selection
• Ensures a base level of coverage
• More complex to administer

• Employees elect any or all available benefits
• Maximum flexibility to employees
• Complex administration
• Adverse selection could be a problem

Benefits Design Group, Inc. offers 2 other Section 125 Flexible Benefit Plans:

• Premium Only Plans
• Full Flex Plans
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