Page 166 - Essentials of Payroll: Management and Accounting

Benefits
(($40,000 x (1–27%)) - $800).When she enrolls in the cafeteria plan and
has $800 removed from her pay on a pretax basis to pay for the medical
expenses, her take-home pay, net of medical costs, increases to $28,616,
which is calculated as (($40,000 - $800) x (1–27%)).The increase in her
take-home pay of $216 is entirely attributable to the removal of med-

ical costs from her pay before tax calculations and deductions are made.
The cafeteria plans appears to be a sure-fire way to increase employee
take-home pay. However, it has some built-in restrictions that, if not
managed carefully, can result in a reduction in take-home pay. One issue
is that employees are only allowed to choose the total amount of their
annual cafeteria plan deductions at the beginning of the plan year; they
cannot change it again until the plan year has concluded. This “lock-

down” provision can only be altered when there have been changes in
an employee’s marital status, number of dependents (including adoptions)
or the status of those dependents,residential address,or the employment
status of the employee or a spouse or dependent. Furthermore, these
changes must also result in a change in employee status in the underlying
coverage before the amount of the cafeteria plan deduction can be altered.
Example. To continue the previous example,Allison Schoening’s long-
term medical condition clears up part-way through the year, and she can
stop purchasing prescriptions. Consequently, she wants to reduce the

amount of the cafeteria plan deductions being removed from her pay. She
claims that there has been a change in her status because she changed res-
idences midway through the year.This claim is denied by the cafeteria plan
administrator, because the change in residence did not alter her eligibility
for coverage under the terms of the underlying medical insurance plan.
Example. Allison Schoening decides to adopt a baby after the plan
year has begun.This results in a change in her eligibility under the rules

of the underlying medical insurance plan, which allows her to add the
baby as a dependent. Since this is also an allowable change in status

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