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.
|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|
|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!