Ordering off an Employers' Cafeteria Plan

By: Corry Hunter, CPA

How do I order off of my employers’ cafeteria plan? The name may not make sense but the benefits do.

A cafeteria plan is simply an opportunity to receive pretax benefits from your employer. The benefits you receive can be your health insurance, adoption assistance, group term life insurance, dependent care assistance, and health savings accounts.

Many of us already have health insurance through our employer and if you look at your check, your portion is paid pretax. That means you do not pay FICA or income tax on this benefit. Considering your portion of FICA is 7.5%, if you are in an income tax bracket of 15%, you save $23 in tax for every $100 you put into a cafeteria plan. That’s a great deal.

For anyone who is looking to adopt a child (which can cost tens of thousands of dollars), any tax savings you get is a great benefit. If your employer offers group term life insurance, you should take it. The first $50,000 of coverage is tax-free, as are life insurance proceeds.   

The most widely used program is a Flexible Spending Arrangement (FSA). If your employer offers an FSA, you can elect to have a certain amount deducted from your paycheck monthly to pay for daycare, adoption, and even medical copays. The maximum you can contribute is $5,000 per year if your tax return is married filing joint. That would be $416 out of your monthly paycheck, but would save you a little over $1,000 in taxes. You can have a debit card that draws from the amount set aside until used up, or you can submit receipts for reimbursement. It all depends on how your plan is set up.

There is a downside to an FSA. If you do not use all of the funds by the end of the year, they are retained by the employer and no longer available to you. Some offer a 90-day grace period to use prior year funds. 

If you pay for daycare, you can reasonably predict your costs. Since an FSA is capped at $5,000 per year, this may not even cover the cost if you have 2 or more children in full-time care. Therefore, it is advisable to take the full $5,000. Medical costs are a little more difficult to predict. I generally advise to choose an amount that covers monthly prescriptions and up to 2 monthly doctor visits if you have children. If at the end of the year you have money in your FSA, buy prescription sunglasses and even Band-Aids to ensure you don’t lose your benefit.

It is important to remember that if you used your FSA to get reimbursed for medical expenses or for daycare, you cannot use those same amounts to claim deductions or credits on your income tax return. Anything over and above what you were reimbursed for however, is still allowed. So when looking for a new job, consider the benefits of a cafeteria plan as a valuable portion of your compensation, and speak with your CPA to see how it will work for you.

For more information call Osborne Rincon CPAs at 760-777-9805.