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Section 125: cafeteria plans and public accountants.

Section 125: Cafeteria Plans, or flexible spending plans, have been part of the Internal Revenue Code for nearly 20 years. For the majority of those 20 years they have been in the domain of expensive third party administrators and large employers. According to the November 1995 issue of Flexible Benefits magazine, over three quarters of medium- to large-size employers offer flexible spending accounts to their employees. Only 8% of employers with less than 500 employees offer flexible spending accounts.

However, it is important to note that the smallest group surveyed showed the strongest interest in flexible spending accounts. Seventeen percent of employers with between 200 to 499 employees say they are considering implementing a flex plan this year. That is where the growth in Section 125 cafeteria plans and where the market for accounting firms and professionals offering third-party administration of these plans will be - with small- to mid-sized employers. But what about those employers with less than 200 employees? The marketplace is addressing that question.


Obviously, the awareness of flexible spending plans and cafeteria plans is on the rise. The whole discussion regarding national health care reform and medical savings accounts (MSAs) has raised awareness of methods to control rising health care costs. Many financial and tax experts believe that the development of MSAs will signal an end to flexible spending accounts (FSAs) and cafeteria plans. On first glance there are some differences between the two plans that seem to favor MSAs. However, on closer scrutiny, there are several differences that point to the continued growth of FSAs and Section 125 cafeteria plans.

MSAs feature high deductible health insurance, coupled with the medical savings account to cover health care expenses not covered by insurance. However, limits on MSA contributions could make this a risky proposition for many employees. Items such as glasses and dental work can be paid out of a MSA, but they may not count against the deductible. This could leave some employees facing large medical bills and more exposure due to the high deductible.

With a flexible spending account, the contribution is only limited by the employee's income. An employee with a FSA can place enough money, pre-tax, in an account to cover all expected expenses. (In some cases, the employer can set limits on the amount of contribution an employee can place in a FSA.)

In addition, FSAs offer the ability to pay for dependent care expenses with pre-tax dollars. With a MSA, this option is not available. Employees who can pay up to $5,000 worth of daycare expenses pre-tax with a FSA realize a substantial tax savings. With the ever-growing number of two-wage earning families with dependent children, this option alone will sell many employers and employees on FSAs.


The spreading of Section 125 cafeteria plans into smaller businesses represents a significant development to those who operate them. The obvious benefit for employers is the opportunity to realize significant tax savings with the plan. For every dollar an employee runs through the plan, the employer saves their matching portion of FICA (Social Security) tax, or 7.65%. That means if a business's employees collectively run $20,000 a year through the plan, the operator of that business will save $1,530 annually. In most cases, the savings more than pays for cost of the plan.

As more employees become aware of flexible spending plans and more employers offer it as a benefit, business owners will need to do the same to attract and retain quality employees. As an employer, a significant amount of time and money is invested in recruiting and training employees. By offering a cafeteria plan, they can help protect that investment.


FlexSystem, a successful approach to Section 125 cafeteria plan administration, has recently received the support of the National Society of Public Accountants. FlexSystem provides all the required documentation, software, forms, educational video, technical bulletins and toll-free support you need to administrate the plan for your clients and employees. FlexSystem serves the portion of the marketplace with the most potential for growth, the small- to mid-sized employer. FlexSystem is cost effective for businesses with as few as three to five employees.

As a member of the National Society of Public Accountants, you are entitled to a $300 discount on a multiple-user version (up to 300 participants) of FlexSystem or a $200 discount on a single-user version (up to 50 participants). For more information on how FlexSystem can help you serve your clients, call 1-800-422-4661.
COPYRIGHT 1996 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996 Gale, Cengage Learning. All rights reserved.

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Author:Thurmond, Jeffery C.
Publication:The National Public Accountant
Date:Aug 1, 1996
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