The rising cost of medical care: How small businesses can utilize section 125 to combat growing health care costs.
These businesses are not bearing the brunt of these health care cost increases. A Bureau of Labor Statistics survey found that 44 percent of the businesses increased the amount of the employee share of health insurance premiums in 1998, up from 35 percent in 1997. More and more employers are responding to rapidly rising medical costs by passing some of those costs along to employees. Methods for increasing the employee share include setting higher co-payments, raising deductibles and increasing the worker's share of the premium. In addition to passing on some of the increases to their employees, employers are absorbing some of the cost increases. Fortunately for employers and employees, there is an affordable and accessible way to fight the high cost of medical care a Section 125 Cafeteria Plan.
A Section 125 Plan is known by many names (i.e., 125 Plan, FlexPlan, Flexible Spending Plan, Cafeteria Plan, Set-Aside Accounts, etc.). In essence, Internal Revenue Code Section 125 allows employers to establish an employee benefit plan that facilitates payment of medical insurance premiums, out-of-pocket medical expenses, term life insurance and disability insurance by the employees an a pre-tax basis. A participating employee makes an annual dollar election that is divided by the number of payrolls within the plan year to determine the amount per paycheck that will be deducted and Set aside for payment of the elected expenses. A Section 125 Plan benefits both the employer and employee. The employer saves FICA taxes an every dollar that is processed through the plan. That is a savings of 7.65 percent an every dollar run through the plan. For most employers, the savings incurred more than pay for the cost of administering the plan. The employee benefits by reducing his or her taxable wage (W-2), thereby savin g state, federal and FICA taxes an each dollar, and by paying for eligible expenses with pre-tax rather than after-tax dollars.
In addition to medical expenses, dependent care expenses can also be paid through a Section 125 Plan. Most families with young children easily reach the $5,000 maximum for dependent care. The ability to pay this expense with pre-tax dollars means significant tax savings for both employer and employees with children.
Small Companies and Section 125
Even with this compelling data and overwhelming value, many smaller companies fail to take advantage of the benefits Section 125 offers. Research by the Bureau of Labor Statistics for 1997 says that less than 4 percent of companies with fewer than 100 employees have Section 125 Plans. Smaller employers (fewer than 250 employees) cite cost and administrative complexity as the two biggest barriers to adding a Sectian 125 plan. The cost of administration need not be a barrier to providing this benefit to small businesses. Take the case of one small Midwestern company. Out of 40 eligible employees, 37 participate in the company's Section 125 Cafeteria Plan. The employees in this company represent a wide mix of singles, married couples and families. Collectively, the 37 participating employees will make elections worth more than $85,750 through the Plan in 2000. That includes money for insurance premiums, out of pocket medical expenses and dependent care expenses. The employer saves 7.65 percent on FICA taxes an e very dollar run through the Plan by the employees. That equals an annual saving of roughly $6,560. The fees for the administration of this group's Section 125 Plan are about $2,000 per year. There is also a one-time enrollment fee of $1,000. So this employer is providing a valuable benefit to his or her employees and saving more than $3,550 the first year and more than $4,550 each year after that.
Many Section 125 Administrators routinely ignore the smaller businesses due to size of group, available representation and small profit margins. What an open invitation to tax practitioners! Twenty million employees are participating in cafeteria benefits in one form or another, primarily through the large employee groups. However, the small employer market remains largely untapped. Providing Section 125 Cafeteria Plans to small businesses opens many doors. Small businesses represent an opportunity to provide a service and solidify relationships. The key is finding and developing a relationship with a third-party administrator who is active in the small business arena. With the interactive nature of the Internet and telephone, time and distance are no longer obstacles. Finding an administrator whose services are structured and competitively priced for the small business market is a win-win-win situation. The employees win with affordable health care and an increase in take-home pay; the employers win with ta x savings and happy, productive employees; and the tax professional wins with increased revenue and more long-term, satisfied clients.
Daniel N. Rashke is Chief Executive Officer of Total Administrative Services Corporation (TASC), an employee benefits company that develops and markets Section 105 Plans, Section 125 Plans, pension plans and financial aid planning to small business owners. He is one of the initial developers of AgriPlan/BizPlan - Section 105 medical reimbursement plans for sole proprietors.
|Printer friendly Cite/link Email Feedback|
|Author:||Rashke, Daniel N.|
|Publication:||The National Public Accountant|
|Article Type:||Brief Article|
|Date:||Nov 1, 2001|
|Previous Article:||Questions to the tax desk.|
|Next Article:||Section 529 prepaid tuition and savings plan.|