FRINGE BENEFIT CAN LOWER PAYROLL TAXES

CAPE GIRARDEAU -- Most people would think of a cafeteria plan as a fringe benefit that would be a process to eat lunch and save time.

Actually cafeteria plans, another name for flexible spending plan (FSP), are a new fringe benefit that is growing in popularity.

Under FSP, employees can defer income, tax free, into a special account. Funds from the account can be used to pay group medical and dental insurance premiums, unreimbursed medical and dental expenses, and dependent care expenses. The funds contributed to the account are not subject to payroll taxes for the employee or employer.

A company recently opened locally that handles FSP plans.

Kurt May and Sissy Burnett established Beneflex Inc. to serve the area market. Burnett said the company is the only one in the region that is involved solely in administering the FSPs.

She indicated that participation in the program can be beneficial to employees who pay for group medical insurance premiums, have day care expenses, have high medical insurance deductibles, are having a baby, or who have a family member with a medical condition who has limited or no medical insurance coverage. An individual without a family, low medical expenses, and employer-paid medical insurance premiums would be less likely to benefit from the program.

Employees realize potential savings on federal and state income taxes and on Social Security taxes (7.65 percent) on the contributed amount. Employers save the matching Social Security tax, workers compensation, unemployment insurance, and others on the deferred income.

The ability to earmark the contributed income as tax free originates in Congressional action revising the Internal Revenue Section 125 Code in 1978. Large companies with thousands of employees used the FSPs originally. When Section 125 was liberalized in 1986, much smaller employers became eligible for the program.

The plan has drawbacks. "The employees must use the full amount of their contributions to each benefit election by the end of the plan year or they will lose the unused portion," Burnett warned. "Any remaining amount will revert back to the employer." To help prevent the loss, employees are issued statements quarterly and one month preceding the ending date on their individual account balances. Elective medical or dental care can be scheduled to use remaining funds.

One drawback to the employer is that he is required to prefund the total amount selected by the employee at the beginning of the contract. For example, an employee selecting a $1,000 level could obtain medical services costing $1,000 after participating only one month, then quit. The employer would be liable for the full amount beyond what the employee had contributed the first month.

Normally, the plan saves money for the employer and employee by lowering payroll taxes. Burnett said the average savings for a family ranges between $800 and $1,500 annually, depending on the relative amount of medical and dental expenses. Savings for employers vary widely. A business with fifteen participants could save about $2,700 in payroll taxes, offset by $400 in administrative costs, for a insurance premium only plan.

Burnett said participating employees determine the amount they want to contribute to the fund in individual counseling sessions.

The contribution level can be altered during the contract term only due to death or disability, a change in family status, or if employment ceases, according to Internal Revenue Service regulations.

Burnett has 11 years' experience in the group medical and dental insurance industry. The Louisville, Ky., native handled FSPs and other matters for Spectrum Benefits Inc., a St. Louis third party administrator, the last three years. She and her husband and two children live north of Cape Girardeau.

May has his own insurance agency dealing with employee group benefits and is a special agent with Northwestern Mutual Life. He and his wife and children live near Whitewater.