A cafeteria plan helps employers in many ways. In addition to enabling the employer to save on its share of FICA (Social Security and Medicare) and FUTA (federal unemployment) taxes, a cafeteria plan can:
- help recruit and retain employees;
- increase flexibility to design employee benefits for diverse employee needs;
- in some states, save on state unemployment insurance and workers’ compensation taxes;
- cushion the blow of premium increases; and
- increase employee awareness of the cost of each benefit.
Here’s a great example of the employee and employer tax savings when offering a POP plan.
Sample Tax Savings With a POP
Employee “A” is married, has one child, and pays $6,400 in premiums for family coverage under their employers health insurance plan. In 2018, this employee earns $75,000 and her husband (a student) earns no income. They file a joint tax return.
| POP/CafeteriaPlan | No CafeteriaPlan | ||
| 1. | Adjusted Gross Income | $75,000 | $75,000 |
| 2. | Salary Reductions for Premiums | ($6,400) | $0 |
| 3. | W-2 Gross Wages | $68,600 | $75,000 |
| 4. | Standard Deduction | ($24,000) | ($24,000) |
| 5. | Taxable Income | $44,600 | $51,000 |
| 6. | W-2 Gross Wages | $68,600 | $75,000 |
| 7. | Federal Income Tax | ($4,971) | ($5,739) |
| 8. | FICA Tax (7.65% of line 3) | ($5,248) | ($5,738) |
| 9. | After-Tax Premium Payments | $0 | ($6,400) |
| 10. | Pay After Taxes and Premium Payments | $58,381 | $57,123 |
| The employee would save about $1,258 in taxes for 2018 by paying for her health insurance premiums under the POP. A shortcut for determining the savings is to multiply the employee’s $6,400 of salary reductions by 19.65% (Employee “A” 12% marginal tax rate plus 7.65% for FICA = 19.65%).
The employer also saves on taxes. For example, it saves $490 in FICA employment taxes (i.e., 7.65% × $6,400 of salary reductions). PS- OCA’s myPOP express only cost $250 per year! By offering a POP plan employers will make money!
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