Financial Management Capstone Week 4

I have been asked to upgrade XYZ Inc.'s fringe benefits to ensure that its employees are getting the best plan possible. I am recommending the Cafeteria Plan, also known as the flexible benefit plan, for the company. This plan will allow employees to choose from a variety of benefits that they can tailor to best suits their needs. Cafeteria plans can offer health insurance to employees, their spouses and their dependents. Domestic partner and dependents may not be participants in this plan. The reason that they can't participate is because they are not employees.

The employees that are considered highly compensated for the cafeteria plan are any officer of the XYZ, any employee with over 5% of the voting power or value of the company stock, any employee that XYZ would consider as a highly-compensated employee based on the facts and circumstances, and a spouse or dependent of an individual as described in the first three categories. In addition, the employee can contribute no more than 33% of the total amount contributed by the non-highly compensated employees.

The Cafeteria plan has many options that include health and accident insurance, cash benefits; retirement plan contributions and/or tax advantages. The employer maintains a separate written plan for employees that meets the specific requirements of and regulations of section 125 of the Internal Revenue Code. Under section 125 plan, an employer can offer employees a choice of taxable and nontaxable benefits without the choice causing the benefits to become taxable to the company. The code of section 125 provides its participants with an opportunity to receive specific benefits on a pretax basis. Participants of the cafeteria plan must be permitted to choose among at least one taxable benefit and one qualified benefit.

A qualified benefit refers to a benefit that does not reschedule compensation. A qualified benefit is not included in an employee's gross income under a particular provision of the Code, without being subject to the principles of constructive receipt. The qualified benefits may include accident and health benefits. The benefit includes adoption assistance, dependent care assistance, group-term life insurance coverage, and health savings accounts, including distributions to pay long-term care services.

The written plan must precisely detail all benefits through rules for eligibility and elections. The participants are not subject to FICA, FUTA, Medicare tax, or income tax withholding. If there is group-term life insurance that exceeds $50,000 of coverage, the participants subject to social security and Medicare taxes. However, they are not subjected to FUTA tax or income tax withholding.

A flexible spending arrangement, or FSA, is another benefit that the plan offers. FSA is funded by salary reduction that reimburses employees for expenses that are that are a result of certain qualified benefits. FSA offers its employees with an option for dependent care. FSA is a very attractive benefit for the employees that pay for child-care or long-term care for their parents. Most employees may not be aware of this option for tax savings. There lack of knowledge may prevent them from taking advantage of it. Employees may withhold up to $5,000, of their pre-tax salary, annually for dependent care expenses. This can include expenses they disburse while they are working, look for employment or attend school full time. Qualified dependent care expenses can include the care of a child under the age of 13, long-term care for parents, care for a disabled spouse or a dependent incapable of caring for the employee and summer day camps. In addition, if the employee is paying for dependent care with pre-tax dollars, they can save approximately 20 to 40 percent on their child-care expenses. An FSA may be offered, to the employee, for their dependent care assistance, adoption assistance, and medical care reimbursements. These benefits are governed by an annual maximum, as well as, an annual "use-or-lose" rule. The rule states that the FSA funds that are not used, in the year, will be accrued back to the employer. However, the IRS will allow employers to give their employees a grace period of up to two and a half months from the end of the dated plan year to use available funds. An FSA cannot present a collective benefit to the employee beyond the plan year.

Before the employee plan to use the Cafeteria plan for the year, an employee must estimate the amount they'll spend in out-of-pocket medical expenses and/or dependent care expenses during the course of their plan year.

The employees should not to overestimate their annual planned amount, so that they are not caught up with the "use it or lose it" rule. They do not want to risk losing any unused balance left over in their account at the end of each plan year. The employee does not have a grace period for which they can file claims for each plan year. In