A cafeteria plan helps employers in many ways. In addition to enabling the employer to save on its share of FICA (Social Security and Medicare) and FUTA (federal unemployment) taxes, a cafeteria plan can:

  • help recruit and retain employees;
  • increase flexibility to design employee benefits for diverse employee needs;
  • in some states, save on state unemployment insurance and workers’ compensation taxes;
  • cushion the blow of premium increases; and
  • increase employee awareness of the cost of each benefit.

Here’s a great example of the employee and employer tax savings when offering a POP plan.

 

Sample Tax Savings With a POP

Employee “A” is married, has one child, and pays $6,400 in premiums for family coverage under their employers health insurance plan. In 2018, this employee earns $75,000 and her husband (a student) earns no income. They file a joint tax return.

POP/CafeteriaPlan No CafeteriaPlan
1. Adjusted Gross Income $75,000 $75,000
2. Salary Reductions for Premiums ($6,400) $0
3. W-2 Gross Wages $68,600 $75,000
4. Standard Deduction ($24,000) ($24,000)
5. Taxable Income $44,600 $51,000
6. W-2 Gross Wages $68,600 $75,000
7. Federal Income Tax ($4,971) ($5,739)
8. FICA Tax (7.65% of line 3) ($5,248) ($5,738)
9. After-Tax Premium Payments $0 ($6,400)
10. Pay After Taxes and Premium Payments $58,381 $57,123
The employee would save about $1,258 in taxes for 2018 by paying for her health insurance premiums under the POP. A shortcut for determining the savings is to multiply the employee’s $6,400 of salary reductions by 19.65% (Employee “A” 12% marginal tax rate plus 7.65% for FICA = 19.65%).

The employer also saves on taxes. For example, it saves $490 in FICA employment taxes (i.e., 7.65% × $6,400 of salary reductions).

PS- OCA’s myPOP express only cost $250 per year! By offering a POP plan employers will make money!