At a House subcommittee hearing last week, experts criticized a tax code provision that prohibits small businesses from using “cafeteria” style health plans that would allow them to save on insurance premiums and medical costs.
“Cafeteria plans are available across the board to large and mid-size companies, non-profits, schools, universities, and the federal government,” Rep. Dave Brat (R-VA), chair of the House Subcommittee on Economic Growth, Tax, and Capital Access said 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.”
“Cafeteria plans”, regulated by Section 125 of the Internal Revenue Code, 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.
“They are called cafeteria plans because these plans give employees the ability to select benefits from a menu set by their employer, in exchange for forgoing compensation,” Jennifer Brown, manager of research at the National Institute on Retirement Security (NIRS), said. “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.”
Employers that sponsor Section 125 plans can make a number of other benefits available to employees, such as the medical reimbursement and dependent care.
“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,” Elise Feldman, president of Feldman Benefit Services said.
Cafeteria plans cannot be used by sole proprietors, partners in a partnership, S-corporation shareholders holding an interest of 2% or greater, and members in a limited liability company that has elected to be taxed as a partnership. The U.S. Small Business Administration (SBA) said 73 percent of small employers are sole proprietorships, partnerships or S-corporations, which means that almost three quarters of small business owners are excluded from participating in a cafeteria plan,” Paula Calimafde, chair of the Small Business Council of America, said.
“Cafeteria plans allow employers to offer flexible benefits to their workers, at a reasonable cost to both the workers and the employers,” Matt Tassey, treasurer of the National Association of Insurance and Financial Advisors (NAIFA), said. “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. “