PAYPRO and
Flexible Spending Accounts
Employers choose to implement Flexible Spending Accounts to help their employees save substantial tax dollars, with some tax saving for employers too. The extent to which an employer will experience tax savings and other advantages depends on the type of plan, the nature of the workforce, and in some cases state and local laws. Employers may:
- Realize FICA and FUTA saving with salaray reduction;
- Save under state unemployment insurance and workers’ compensation laws;
- Increase employee’s awareness of benefit costs;
- Contain health care costs in some cases; and
- Cushion the blow of significant premium increases.
An employee’s advantages arising from the Flexible Spending Accounts participation will depend on the employee’s tax status, the amount of his or her taxable income and pre-tax salary reduction elections, state and local laws and the cafeteria plan’s features.
- No Federal Income Tax
Employees do not have to pay federal income tax on salary reduction amounts to a cafeteria plan- employees can buy qualified benefits with pre-tax dollars. And if a plan with employer contributions offers a cash-out option, employees who take health coverage or other benefits instead of cash will not be taxed on the cash that they could have received (but chose not to receive).
- No FICA, FUTA, or RRTA Tax
There are no Social Security and Medicare (FICA) taxes, federal unemployment (FUTA) taxes, or Railroad Retirement Tax Act (RRTA) taxes on pre-tax salary reductions under a cafeteria plan. FICA, FUTA, and RRTA wages do not include any payment made to, or on behalf of, an employee of his or her beneficiary under a Section 125 cafeteria plan, if (1) the payment would not be treated as wages without regard to the plan; and (2) it is reasonable to believe that Section 125 would not treat any wages as constructively received.
- State and Local Taxes
Most state and local governments treat cafeteria plan elections favorably for state and local income tax purposes. States vary as to how they treat cafeteria plan elections for purposes of state unemployment compensation taxes and workers’ compensation taxes (e.g., some states do not recognize cafeteria plan salary reductions, and they base such taxes on gross pay before cafeteria plan salary reductions).
- Other Advantages
Cafeteria plans allow employees to pay with pre-tax dollars for qualified benefits that may not otherwise be provided by the employer. In addition, cafeteria plans give employees the opportunity to choose the benefits that they want. For example, a cafeteria plan can provide the opportunity for employees to opt out of health coverage and take cash instead, which may benefit employees who do not need the coverage (e.g., because they have coverage through their spouses’ employers).
Who Can Participate
Flex Spending Account Plans are governed by Section 125 of the Internal Revenue Code. They are intended for the benefit of bona fide employees. For that reason, please note that the following are not eligible to participate in the plan: 2%+ Shareholder in an S Corporation, their spouses, children (regardless if they are a dependent), parents as well as grandparents, Members of an LLC, Partners in a Partnership, Sole Proprietors, etc. Owners in a C Corporation are eligible.
Key Employees are eligible. All plans are subject to discrimination tests, however, which may limit their participation and/or amounts.
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