Many salary reduction plans (Cafeteria Plans) go beyond the premium payment plan format and allow employees to buy benefits on a pre-tax basis under employer-sponsored flexible spending arrangements, e.g. a health FSA, a DCAP (dependent care assistance program), or both. The employee must elect a specific amount to be contributed toward each benefit.
Health FSAs are generally designed to reimburse medical, vision, and/or dental expenses that are not covered by any other insurance plan.
What are the advantages of sponsoring a Cafeteria Plan with Spending Accounts?
• Realize FICA and FUTA savings with salary reduction plans;
• Increase employee’s awareness of benefit costs;
• Contain health care cost in some cases, and
• Cushion the blow of premium increases.
What are the disadvantages of sponsoring a Cafeteria Plan with Spending Accounts:
• Subject to the financial risk which requires there be uniform coverage throughout the coverage period, and
• Set-up and administration costs.
EMPLOYER SUBSIDIZED BENEFITS
Employers may subsidize benefits under a cafeteria plan, to encourage employees to participate, in several ways.
Contingent Contribution: An employer pays a specified amount towards the cost of a benefits only if the employee pays for the remainder.
Seeding Contribution: the Employer contributes a set amount of money into each employees’ health FSA. This will give the employees experience with using a Flex plan.
Matching Contribution: The Employer matches the employee contribution to a health FSA. For example, the Employer will contribute dollar for dollar up to $400 per year, into the employees’ health FSA. This will give the employees experience with using a Flex plan plus it will let them experience the savings they can experience by using a Flex plan.
Flex Credits: An employer offers credits (employer money) toward the purchase of qualified benefits (e.g., the employer makes $1,000 per year available to be used towards the purchase of benefits in the plan).
Some employers combine several contribution methods or vary the amount of contributions given to employees (e.g., by giving more money to employees who elect family coverage than to those who elect employee-only coverage). These mechanisms are often structured to promote an employer’s desired benefit arrangement.
