Cafeteria Plans and How Owners Benefit

Created with Sketch.

Cafeteria Plans and How Owners Benefit

The fact is that owners can not participate in the company’s Section 125 Cafeteria Plan. Specifically the following owner/employees are not able to participate in a Section 125 Cafeteria Plan:

  • Owners of an S Corporation owning more than 2% and their spouse, parents, children, and grandchildren
  • Partners in a partnership
  • Members of a LLC

The people that fall into this category are not able to withdraw their premiums on a pre-tax basis. They are able to deduct the premiums they pay through their annual tax return to obtain some savings. All though these savings may not be as substantial, having a Section 125 Cafeteria Plan still has 2 significant benefits to the owners.

As owners of a business the bottom line is one of, if not the, highest priority. By setting up a compliant Section 125 Plan, the company will save a substantial amount on taxes. As employee premiums are deducted from their paychecks the employee’s taxable income decreases. This clearly saves the employee some money. However, many overlook the substantial amount saved by the company because it changes the amount of taxes the company pays as well. These savings help bolster the bottom line and possibly increase the amount owners are taking home.

The savings that go to the employee are also a key benefit to owners.  Current trends show that 1 in 3 employees hope to be working elsewhere in the next 12 months. By implementing a Section 125 Premium Only Plan, the owner shows loyalty to the employees in protecting them. This not only helps lower employee turnover, it also helps increase employee productivity.

While at this time it doesn’t appear this IRS regulation or rule will change anytime soon, what many don’t realize is that the owner can benefit as well in addition to offering a great option to their employees.  This happens because as part of the Cafeteria Plan, they in turn are able to avoid many of the matching taxes they are responsible for, now that the employee has reduced their taxable income.  So in the end, even if the owner can’t participate personally, they can still benefit tremendously.

Tags: , , , ,