Cafeteria plans and flexible spending accounts have been around since 1978 as part of Section 125 of the Internal Revenue Code (IRC), but many of our clients are only generally aware of them and have never seriously considered the tremendous tax advantages available through these plans. Two things have happened within the last several years that make these plans dramatically more appealing.

First, companies have increased deductibles and co-pays significantly in order to control increases in health insurance premiums. Some companies have also reduced coverage for certain items such as dental and vision expenses. Now, employees have a much greater exposure to these types of medical related expenses.

Second, technology has really improved the ease of employer administration and employee use of these plans and has driven down their administrative costs. Employees can track their account balances online, and daily reimbursement and direct deposit have dramatically reduced payment turnaround time. Online employee enrollment has virtually eliminated employer administrative hassles related to the annual enrollment process.

The total annual cost to administer a typical FSA plan for a company with 15 or fewer employees is only about $500, and the company payroll tax savings resulting from these plans usually completely offsets the administrative cost. Although the administrative cost for larger employers is greater, larger employers have a greater opportunity to achieve payroll tax savings in excess of any plan related expenses because more employees means greater plan contributions.

The tax benefit to employees for participating in these plans is complete avoidance of any federal, state or local income taxes or payroll taxes on the contributions flowing through the plan. The types of expenses that are eligible for reimbursement from a FSA plan are any out-of-pocket medical expenses described in IRC section 213(d), such as deductibles, prescription drug and office co-pays, over-the-counter medications, vision expenses (including lasik eye surgery) and dental expenses (including orthodontic expenses). Dependent care expenses are also eligible for reimbursement through these plans.

These plans are great tools to help employees pay for escalating medical expenses, and they can be advantageous for companies looking to attract and retain valuable employees. Employees can only access these tax benefits through a company-sponsored FSA plan. The low cost of administration and tax savings available to both employers and employees make these plans a real win-win situation.

Please contact your Rea & Associates representative to discuss the tax benefits available through these plans. We routinely assist clients with the design and implementation of these plans, including facilitating employee FSA plan educational and enrollment meetings. Now is great time to get a plan in place for 2006.

This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 11/9/2005.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

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