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Cafeteria Plans: A Menu of Non-Options for Small Business Owners

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Washington, March 16, 2017 | comments

WASHINGTON – Experts told a Subcommittee of the House Small Business Committee today that millions of American small business owners and employees are barred from using a popular provision of the tax code that would enable them to save on important expenses such as insurance premiums, medical costs and dependent care.

“Cafeteria plans are available across the board to large and mid-size companies, non-profits, schools, universities, and the federal government,” said Subcommittee on Economic Growth, Tax, and Capital Access Chairman Dave Brat (R-VA) in his opening statement. “However, one major category of people who are not allowed to participate in a cafeteria plan is small business owners.  They can sponsor these plans for their employees, but they cannot personally participate.  This provides a disincentive to offering the plan in the first place.”

Small Business Employees Put at a Disadvantage

“In addition to health insurance premium payments, those employers that sponsor Section 125 plans can make a number of other benefits available to employees, such as the Medical Reimbursement benefit as well as the Dependent Care benefit,” testified Elise Feldman, the President of Feldman Benefit Services, Inc. “These benefits give the employees an opportunity to provide better health care for themselves and their family members, because the Section 125 plan structure enables the employees to do so more easily and more affordably (because the contributions are made on a pre-tax basis). The option to take advantage of these benefits is generally appreciated by the employees.”

Benefits of Cafeteria Plans

“Section 125 of the Internal Revenue Code (“Code”) regulates “Cafeteria Plans,” which are tax favored methods for offering a variety of fringe benefits to employees on a pre-tax basis through a plan offered by an employer,” said Jennifer Brown, the Manager of Research at the National Institute on Retirement Security (NIRS). “They are called cafeteria plans because these plans give an employees the ability to select benefits from a menu set by their employer, in exchange for forgoing compensation. Some cafeteria plans offer a choice between cash and one or more type of insurance coverage, while other plans offer one or more reimbursement accounts.”

3/4 of Small Business Owners Excluded

“While employees of most large and mid-sized businesses as well as non-profits, schools, universities and the federal government can take advantage of the valuable benefits provided by cafeteria plans, most small business owners are not allowed to participate in a cafeteria plan,” said Paula Calimafde, the  Chair of the Small Business Council of America. “Specifically, cafeteria plans can be utilized by common-law employees, but not by sole proprietors, partners in a partnership, S-corporation shareholders holding an interest of 2% or greater (and by attribution, their family members) and members in a limited liability company that has elected to be taxed as a partnership. According to recent data from the U.S. Small Business Administration (SBA), seventy-three percent of small employers are sole proprietorships, partnerships or S-corporations – meaning, that almost three quarters of small business owners are excluded from participating in a cafeteria plan.”

Plans Could Provide Flexibility for Small Businesses

“Cafeteria plans allow employers to offer flexible benefits to their workers, at a reasonable cost to both the workers and the employers,” explained Matt Tassey, the Treasurer of the National Association of Insurance and Financial Advisors (NAIFA). “The flexibility of being able to let workers choose benefits best suited to their unique circumstances is often the most important reason for an employer to establish and maintain this type of benefits plan. It is unfair to pass-through business owners to exclude them from eligibility to participate in cafeteria plans. And, it may discourage these owners from offering—and paying for—cafeteria plan benefits to those who work for them. “

You can watch full video of today’s hearing here and read full testimony here.

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Tags: Taxes