The Disadvantages of a Flexible Benefits Plan
Original post by Cindy Quarters of Demand Media
A flexible benefits plan can provide employees with various options that they can pay for with pre-tax dollars. This provides tax savings, because the money spent on the plan is not counted as income. Sometimes called a cafeteria plan, a flexible benefits plan offers a menu of choices to participants. It is authorized under the Internal Revenue Code Section 125.
A flexible benefits plan allows employers to offer a range of benefits, and employees can choose to participate in those that fit their needs. Money for allowable options is taken from an employee's earnings prior to income tax and other taxes being calculated, although there are exceptions. The funds are placed into special accounts that are used to cover necessary expenses. Certain types of these accounts, most notably health savings accounts, allow the money to roll over at the end of the period if it is not used, while other accounts require that the funds are either used or are forfeited at the end of the period.
Some of the choices commonly offered are funds to cover dependent care reimbursement, health care reimbursement and selective insurance coverage. People who have children, or an elderly relative, can opt for dependent care coverage. A worker covered by a spouse’s insurance plan would likely select vision and dental coverage, but not total health care insurance. A health savings account is another common flexible benefit plan, allowing funds to be placed in the account as a reserve for future medical expenses.
Despite the fact that a flexible benefits plan has many good points, there are also some disadvantages to such a plan. Depending on the particular options selected, taxes such as FICA, social security and Medicare, can be taken from certain types of funds, such as adoption assistance accounts. Domestic partners are not allowed to participate in cafeteria plans, because participation is limited to employees, spouses and dependents. The plan has an annual enrollment period, and changes can only be made during the enrollment period each year.
Although domestic partners are not allowed to actively take part in a flexible benefits plan, they are allowed to benefit from choices that the employed partner makes, such as for dependent care and health insurance. Employees can't alter their plan choices until the annual enrollment period. Cafeteria plans typically require a written plan as well as annual reporting to the IRS to remain qualified.
- IRS: FAQs for government entities regarding Cafeteria Plans
- United States Department of Labor: Pretax Benefits: Access to Section 125 Cafeteria Benefits
- King County Metro Transit: Section 132(f) Commuter Benefits Plans vs. Section 125 Flexible Spending Plans
About the Author
Cindy Quarters has been writing professionally since 1984, creating both user manuals and training documentation. She also writes travel, pet and gardening articles, with work published in "Radiance Magazine" and the "AKC Gazette." Quarters earned a Bachelor of Arts in English from Washington State University, as well as a master's degree in management information systems from West Coast University.
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