By: Jørgen K. Christiansen
Dallas , Texas

lmost every for profit and nonprofit organization will have a Section 125 (cafeteria.) plan in the 1990s. If an agent does not introduce this concept to his clients, one of his predatory competitors will.

The Tax Reform Act of 1986 eliminated most "tax shelters"' in real estate, oil and gas, and so forth, and in effect put the tax shelter promoters out of business. The exception to this legal purge was the "working people's" tax shelter cafeteria plans under Internal Revenue Code (IRC) Section 125.

In the past year, the creative staffs of the House Ways and Means and Senate Finance committees (the same brilliant people who gave us Section 89) tried to cap cafeteria plan benefits at $500. The joint lobbying of industry and labor overpowered the $500 proposal. Cafeteria plans are alive, strong, and growing. Every company that provides fundamental employee benefits needs to consider using Section 125 to reduce benefit costs and at the same time expand the coverage package.

The agent does not have to become an expert in Internal Revenue Service (IRS) employee benefits law to understand and communicate the concept, nor does the agent have to be concerned about administrative headaches.

Our experience working with brokers has taught us that a clear understanding and a crisp, clean presentation coupled with affordable, efficient administration make for a happy client. Every marketing concept has gone through growing pains, and cafeteria plans are no exception.

There were two schools of thought initially: that the program should be product driven and that the program should be administrative driven. As their names imply, each category had a unique goal.

The product driven organizations were light on administrative capability and heavy on premium production as the goal of a complex sales presentation that, in most cases, left the employee confused and the employer upset. At the other end of the spectrum were the administrative driven programs that looked to fees and float for their compensation. Employee participation was limited because of "gal) time" between salary reduction and benefit payments. Employee participants did not ha e the cash flow to allow the luxury of the gap, and employers often were reluctant to part with control of the funds.

We have come to our present knowledge through experience gained by applying prudent business principles and, frankly, through trial and error. We do not hold ourselves out as experts for what we say but for what we do and how we do our job.

"Every company that provides fundamental employee benefits needs to consider using Section 125.."

A cafeteria plan, using the authority granted in IRC Section 125, enables the employer to adopt an employee benefit plan that gives employees the right to choose their compensation in the form of nontaxable benefits rather than taxable cash. Rather than choose to receive cash, pay taxes, and then pay for childcare, Mary Employee can choose to have her employer pay for childcare.

This same logic applies to other benefits that Section 125 enables employees to include in the "Cafeteria menu." When Mary Employee requests her employer to pay for menu benefits, she pays through salary reduction, not deduction. She is electing to receive compensation in the form of nontaxable benefits rather than taxable cash. Therefore, Mary's salary is reduced to pay for the benefits, her taxable income is reduced for income tax and Federal Insurance Contributions Act (FICA) tax, and her net spendable income increases!

This does not cost the employer more money. His cash flow also is increased. When Mary requested her salary be reduced to pay for benefits, the employer shifted corporate expenses away from payroll and into none payroll expenses. The Section 125 benefits are not income to Mary, so they are not subject to withholding or FICA, therefore the employer does not have to match that portion of the FICA. In some jurisdictions, there is also a reduction in worker's compensation premiums.

The logic is irrefutable. If an employer provides a cafeteria plan to his employees, he makes money and at the same time provides his employees with more net take home pay!

Now that we understand the logic, how7 do we sell the concept, and what profit can we expect to make for our efforts? It is a cliché but the concept sells itself when it is clearly defined and communicated.

After the concept sale, the next step is plan design and administration. Cafeteria plans range from the simple Premium Only Plan (POP) to the full blown Flexible Benefit Plan, with many choices in between.

Let us walk through a sample case. The agent has sold the concept, and now the agent will determine which model plan will meet the employer's needs.

The first step is the employer benefit profile. The employer currently pays for all the employees' group health insurance but not for the dependent coverage. The employees pay for their dependent coverage. There is no childcare facility on the premises, and there is no dental insurance. There is a $500 deductible on the group insurance and a co-insurance feature of 80-20 to $10,000. The company has a salary deduction cancer insurance plan.

nd pay for selected benefits using none taxed dollars. This is done by using the "tax shelter" in Section 125.

The employee now can pay for the following with none taxed dollars:

This plan saves money for the employer. These savings will vary depending on the number of employees and the benefits offered. The employees will have more take home pay.

What are the negatives? The first and most glaring pitfall, a poorly communicated program, can be eliminated easily.

The problem is eliminated when the agent thoroughly understands the concept and communicates it clearly. The next problem is the reduction in the employees' Social Security benefit because of the reduction in the employee and employer contributions.

We recommend that after the cafeteria plan is in place and has functioned for a couple of months, a salary savings plan be instituted to start a systematic savings program for the employees. The savings will more than offset the Social Security loss. Some life insurance sales people successfully have combined the two concepts in one interview, and others have preferred the two step approach.

Many agents have used the thousands of dollars saved by the employer to fund a split dollar plan and thereby increase their commissionable premium.

A third perceived problem is the possibility that Congress might change the Internal Revenue Code affecting employee benefits in general and cafeteria plans in particular. As I mentioned, the combined business and labor lobbies stopped proposed legislation that would have capped amounts that maybe incorporated in a cafeteria plan. A recent proposed change would mandate that a claim for unreimbursed medical expenses be paid as incurred up to the limit of annual reduction selected by the employee. Some people believe the employer would have a needless exposure to claims paid. We believe that prudent limits and planning devices can be incorporated into full flexible benefit plans to reduce concerns about abuse.

he agent also needs a system that enables the agent to produce the custom Section 125 proposals. This system must be able to accommodate the agent whether he is conducting a product driven or a fee/administration driven enrollment.

The system also must "manage" the case for the agent. Agents experienced in group enrollment know the hardest part of an enrollment is monitoring.

The system must track all these issues; if it does not, the agent will have a difficult time tracking the case. The system also should calculate and produce all necessary payroll department information, the agent's commissions, and client group billing.

All of this might sound complicated to agents inexperienced in Section 125plans. This discourages many agents from working with Section 125, and it should not.

Done property, with the right tools, cafeteria plans are not complicated to enroll, and they produce good cash flow from commissions, enrollment fees, and administration fees.

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