About Us
Business Services
Individual Services
Financial & Investment Review
Individual Tax Planning
Business Tax Planning
Tax Calendar
Business Start-Ups
Useful Info
About Our Clients
Web Resources
Employee Fringe Benefits
Track Your Refund
Real Estate & Mortgages
Privacy Policy & Disclaimer
Contact Us
Employer Provided Fringe Benefits

With the United States unemployment rate continuing at record low levels, it's important for businesses to offer generous benefits packages that attract and care for their employees.

Businesses can avoid payroll taxes on the portion of compensation shifted from salary to fringe benefits. Some of the benefits that are nontaxable to employees and certain to be appreciated include group-term life insurance (up to $50,000), medical insurance, parking, employee discounts, and noncash holiday gifts. Employees who receive these benefits in lieu of salary decrease their taxable compensation.

The new SIMPLE and 401(k) plans are also excellent benefits that can be offered at little cost to the business. Refer to the accompanying chart to determine which plan might be better suited for your business. More about these plans is discussed on pages -- and --.

Tax Tip

If you have 100 or fewer employees, consider establishing a SIMPLE retirement plan. It has low overhead and, as an owner-employee, you can also participate.

Which Is Best For Your Business? SIMPLE vs. Traditional 401(k)

  Standard 401(k) SIMPLE IRA SIMPLE 401(k)
Maximum business Size Less than 100 employees Less than 100 employees No limit
Individual Contribution Limit $7,000 $7,000 $11,000
Discrimination Testing No Limited Yes
Mandatory Employer Match Yes, 1% - 3% of salary Yes, 3% of salary No
Vesting Immediate Immediate Up to 7 years
Administration Least Medium Most

Cafeteria Plans

Cafeteria plans lower taxes for both employers and employees. You can set up a plan that allows you to offer benefits to your employees without lowering their pay, and at the same time save you money.

Also known as Section 125 Plans or "Flexible Spending Accounts," cafeteria plans allow employees to redirect compensation to pay for qualified unreimbursed medical expenses, dependent care expenses, adoption expenses, and certain insurance premium contributions before personal taxes are computed on their paychecks. So, employees pay less taxes because their taxable income is lower. Plus, employees don't have to pay social security tax on amounts placed in their cafeteria plan accounts. This means the business saves taxes as well, because it pays less in social security matching funds.

Tax Tip

By making use of a "cafeteria plan, your employees will pay less income tax. You'll also save because you'll pay less in social security matching funds.

While regulations prohibit a sole proprietor, partner, members of an LLC (in most cases), or individuals owning more than 2% of an S corporation from participating in the cafeteria plan, they may still sponsor a plan and benefit from the savings on payroll taxes attributable to other employees.

Dependent Care

Many cafeteria plans allow employees to pay for up to $5,000 of child and adult dependent care expenses each year with pretax dollars. Generally, the child must be younger than 13 or disabled for them to qualify.

Employees cannot take advantage of this option and also take the childcare credit on their personal tax return. However, if they are in at least the 27% tax bracket, paying for dependent care expenses through the cafeteria plan will likely save them more than the child care credit.

Health Insurance

Many employers who sponsor health insurance for their employees also require employees to pick up a portion of the premium. If you are not permitting your employees to payroll deduct their premiums on a pretax basis, you are losing valuable tax savings. In fact, for every dollar employees spend on health insurance, you could save 7.65%, or the employer's FICA match. Premium Only Plans are simple to set up and easy to administer, and they don't require filing claims as do other types of cafeteria plans.

The "Skinny" On Section 125 Plans


Plan Document
Employee Contributions
Employee share of health insurance
Unlimited dollar amount
Up to $5,000 per year
Up to $5,000 per year ($6000 for special needs child)
Employer Contributions
No required
No required
No required
No required
Use It Or Lose It
Employee Tax Savings+
$22 to $47 for every $100 contributed
$22 to $47 for every $100 contributed
$22 to $47 for every $100 contributed
$22 to $47 for every $100 contributed
Employer Tax Savings++
7.65% of employee contribution
7.65% of employee contribution
7.65% of employee contribution
7.65% of employee contribution
Annual IRS Filing (No Tax Due)
* Loss of employee contribution may occur when underlying insurance coverage is dropped without a valid change of status (i.e. family status, full-time to part-time work, or change in premium amount).
** "Use it or lose it" provision would be neutralized if Congress enacts pending legislation. Proposals, if passed, would provide for tax-favored rollover of unclaimed balances. Contact us for details.
+ Savings include employee FICA, federal tax, and state income tax where applicable except for New Jersey and Alaska.
++ Savings will be less for employee earnings in excess of FICA base.

Adoption Assistance

If an employee is adopting a child, a cafeteria plan can reimburse up to $5,000 ($6,000 for a special needs child) of adoption expenses. Employees can only take the reimbursement once per child. So, if the adoption process spans several years, they need to consider which year is best for this reimbursement. This benefit is gradually phased out based on AGI.

Your employees may benefit by using the adoption assistance as a tax credit. The $5,000/$6,000 limits are the same as if the reimbursement is filed through a cafeteria plan. If they are in at least the 27% tax bracket, paying for adoption expenses through the cafeteria plan will likely save them more than the credit.

Return to Business Tax Planning


7327 Rosewood Manor Lane
Gaithersburg, Maryland 20882


The materials on our site have been prepared for informational purposes only and should not be acted upon without professional advice

© 2000     All Rights Reserved