Page 165 - Essentials of Payroll: Management and Accounting

ESSENTIALS of Payr oll: Management and Accounting
Cafeteria Plans
A cafeteria plan allows employees to pay for some benefits with pretax
dollars, so that the amount of taxable income to them is reduced. In its
simplest form, a Premium-Only Plan (POP) allows employees to take
employer-required medical insurance deductibles from their pretax

income. This version of the cafeteria plan requires almost no effort to
administer, and is essentially invisible to employees.The primary impact
to them is that the amount of taxes taken out of their paychecks is
slightly reduced.
A more comprehensive cafeteria plan includes a Flexible Spending
Account (FSA), which allows employees to have money withheld from
their pay on a pretax basis and stored in a fund, which they can draw
down by being reimbursed for medical or dependent care expenses.
Example. Allison Schoening has a long-term medical condition that

she knows will require a multitude of prescriptions over the plan year.
She knows the prescription co-pays will cost her at least $800 during
the year. Accordingly, at the beginning of the year, she elects to have a
total of $800 deducted from her pay in equal installments over the
course of the year.When she pays for a co-pay, she keeps the receipt and
forwards it to the payroll department, which reimburses her for it from
the funds that she has already had deducted from her pay.

By having funds withdrawn from their pay prior to the calculation
of taxes, employees will not pay any taxes (e.g., income taxes, Social
Security taxes, or Medicare taxes) on the withdrawn funds.
Example. To continue the previous example,Allison Schoening earns
$40,000 per year. The total of all taxes taken out of her pay, including
federal and state income taxes, Social Security, and Medicare taxes, is 27
percent. Her net take-home pay, after also taking out $800 for the pre-
viously described medical expenses, is $28,400, which is calculated as

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