Workshop: Cafeteria Plans and the Payroll Department

May 19, 2009

Speaker:
Larry White, CPP, Director of Payroll Training for the American Payroll Association

Payroll Managers Are Watchdogs Over Cafeteria Benefits Plans

Cafeteria plans, which offer employees a menu of benefits, have become increasingly popular as costs for health care, adoption, and dependent care rise.

For payroll managers, this means keeping track of changes to the program to ensure that the company stays in compliance with the Internal Revenue Code.

“If there is a change in benefits, the company needs to revise its cafeteria plan,” said Larry White, CPP, director of training for the American Payroll Association. “This is not a payroll function, but when the IRS walks in, guess who they’re going to talk to?”

White, who led a workshop on cafeteria benefits plans at APA’s 27th  annual Congress Tuesday at the Long Beach Convention Center  in Long Beach, Calif., said the management of most cafeteria plans, known as Section 125 plans, is done by the employer’s human resources department.

“That’s not to say you shouldn’t know about it,” he said, adding that when it comes to compliance issues, “we can at least tell someone about it so it won’t come back later to bite the company.”

Under the Internal Revenue Code, a written plan document is required  for all Section 125 programs. The document,  which is usually on file in the human resources department, must include a description of the benefits, eligibility rules, how choices are made, contribution guidelines, and a definition of the plan year. Any changes need to be added to the document, which should be updated periodically.

“If you haven’t seen the plan document, you might look at it,” White said. “Maybe no one has read it lately to make sure that what your company offers in the plan is actually in the document. If not, you may not be in compliance.”

Ensuring compliance affects payroll departments because of the tax consequences of offering benefits under a Section 125 plan, White said. Under the plan, employee contributions are deducted from wages before taxes, thus reducing the employee’s taxable income and the employer’s payroll tax obligation.

While the benefits can be administered as an after-tax program, White said, the highest savings are realized under a pre-tax program. An employer can save 7.65 percent of every dollar in benefits, he said.

In recent years, IRS has considered dropping Section 125 plans because the program has been abused by some employers, only to back away from  the proposal, White said, adding that disbanding the program is again under consideration.