Opting out of cafeteria plan

[Guest benefitsfordummies]

I have an employee who is dead set that he does not want to take part in our cafeteria plan to have his health benefits pre-tax because he feels it is affecting the gross wages reported for his social security benefits.

How do I find out if one out of 100 employees can decide not to take his benefits pre-tax?

[Kirk Maldonado]

What does the plan say?

[GBurns]

Which plan, the Cafeteria Plan or the Health Plan?

[g8r]

I wouldn't think it would be an issue with the health plan. It's unlikely the health plan requires everyone to be covered -- and even if it did, the person could pay with after-tax dollars and the insurance company wouldn't care. All they care about is the payment of the premium.

And, if it's through a cafeteria plan that means the employee has a choice of compensation or a non-taxable benefit. Thus, by offering it through a cafe plan you're offering a choice of not paying the premium with pre-tax dollars. I suppose you could provide that the premium can only be paid through the cafeteria plan, but I don't know why the employer would do that. But, if it does, you won't find that written in the cafeteria plan or health plan.

[papogi]

Here's a basic analysis done within the last couple years looking at pre-tax money and SS benefits:

"Through 125, an employee can avoid federal income tax and social security tax, but as you know, their social security benefits will be affected. Since SS benefits are calculated based on the employee's average monthly earnings, using pre-tax dollars to pay for medical premiums will reduce SS benefits. Here’s an example: An employee earns $30,000 each year. Social Security expects to replace about 42% of this employee's earnings based on that $30,000/year amount. This percentage varies based on those yearly earnings, ranging from 30%-45% for almost all Americans. Anyway, this comes to $12,600/year from SS. Now let's factor in the pre-tax dollars. Assume the employee has $1000 each year deducted pre-tax for medical premiums over his/her entire working life (you can factor this up or down if you like). This reduces yearly earnings from $30,000 to $29,000 and raises the SS replaced income from 42% to about 42.5%, based on a recent SS benefits table. 42.5% of $29,000 is $12,325. So, for each $1000 per year deducted in pre-tax dollars, the yearly SS benefit is reduced $275 for this employee. However, for each $1000 per year in pre-tax dollars deducted from his/her pay, federal income taxes are reduced by $250 (depending on the bracket and number of allowances), and SS taxes are reduced by $76.50 (the social security amount they would have contributed) for a total savings up front of about $326.50. Note that all these calculations are in today's dollars. If we include long-term trends in inflation versus long-term trends in investing, the pre-tax argument is even more convincing, as well as the valid fear that SS may not be as strong in the future as it is now. Financially, it seems much better to realize the savings up front, rather than basically gambling on them in social security."

[david rigby]

Anyone can put a paragraph in quotes. When you do so, please offer the source and the (at least approximate) date.

I'm not sure the dollar amounts in the above quote are accurate, but there is some validity to the general argument. However, that does not necessarily lead to the conclusion in the last sentence.

[mbozek]

Why does the employer care whether the contributions are made with pre or after tax dollars as long as they are made. Since the ee cant be forced to contribute to a cafe plan, he can make the contributions for health ins with AT dollars. Older ees who are close to retirement want to maximize their SS benefits.

[papogi]

pax, the quoted paragraph above was from a benefits co-worker of mine asked to put together a brief analysis of the issue, and I didn’t want to throw out the name of someone nobody here has ever heard of. In a sense, it doesn’t amtter who said it. You can think it through and agree with it or not. As for when it was done, I mentioned that it was within the last couple years, and that’s all I know. It was probably closer to two years ago than two months ago. I put it in quotes to at least be clear that they are not my words, although I agree with the overall view. As for the statement at the end, you are correct. It was only an opinion, based on the prevailing thought on the direction of SS benefits, the rising age to obtain full benefits, and the potential that a greater percentage of those benefits will be taxable. You can certainly arrive at a different conclusion, and time will tell. It’s all prediction at this point. I think the post does at least further the discussion of this point (pre-tax deductions and SS benefits).

[E as in ERISA]

I know some plans where the employees cannot participate in the health plan without also enrolling in the cafeteria plan and paying the premiums pretax. The employer doesn't want the hassles related to that choice -- whether it is having twice as many boxes on the form and fielding questions from employees about which box to put their election in -- or the need to pay to have more buckets within the payroll system to handle pretax v. aftertax contributions and have them appropriately coded -- and make sure that the elections flow to the correct box, etc. And/or they don't want to have to deal with the administration of people going in and out during the year -- which may be allowable if they contributions don't go through a cafeteria plan. I.e., it is a choice made based on administrative convenience, expense, etc. Their plan documents may or may not always be clear on this.

I also know of employers that allow the choice of pre tax or after tax. This is usually in an industry where the wages are lower and the employees are living paycheck to paycheck and may need to cancel their health insurance if their old truck breaks down and they need to buy a new one in order to get to work.

I assume that the employee's election was in the form of a combined health insurance/125 plan election? So he can't change it?

I would make sure that the plan documents and SPD are clear on this going forward.

[GBurns]

A large number of the larger health plans make it mandatory that you either take the health insurance as it is offered or none at all. They have language that states that to receive health benefits you must participate in the Cafeteria plan for any portion for which the employee might be responsible.

Having 1 or few employees paying after tax while the other pay pre-tax presents a problem for payroll processing and for reconciling the insurance billing statements.

[g8r]

O.K. What GBurns stated makes sense - it could be more complicated for payroll, etc. to offer the choice of pre-tax or after-tax.

Which goes back to what I had stated earlier. If the employer is mandating that you pay pre-tax or you don't get the benefit at all, then more than likely this isn't a prohibition in the cafe plan or the health plan. It's a policy being imposed by the employer. The place to look would be an employer handbook or something similar.