Cafeteria Plans

Cafeteria Plans. A. A Cafeteria Plan is defined as follows: 1. A written benefit plan offered by an employer in which: a) All participants are employees, and b) Participants choose cafeteria-style from a menu of two or more cash or qualified benefits. 1) A qualified benefit is not considered part of an employee’s gross income. 2) Qualified benefits include, but are not limited to: (a) Accident and health plans, including medical plans, vision plans, dental plans, accident and disability insurance; (b) Group term life insurance plans up to $50,000; (c) Dependent care assistance plans; (d) Certain stock bonus plans under Section 401(k)(2) of the IRC, but not 401(k)(1) plans. 3) Cash is not a qualified benefit. B. Employees can participate in Cafeteria Plans in different ways as follows: 1. Salary-Reduction Agreements defined and treated as follows: a) A salary-reduction agreement is an agreement between the employer and employee whereby the employee, in exchange for the right to participate in a Cafeteria Plan, accepts a lower salary or foregoes a salary increase. 1) The amount of a salary-reduction agreement is not part of gross income and is not subject to Social Security, Medicare or other income taxes. 2) Amounts used to purchase qualified benefits with a salary-reduction agreement are not the employee’s wages and are not considered income for Medicaid purposes. 2. Employer Contributions, treated as follows: a) Amounts an employer contributes to fund basic benefit levels under a Cafeteria Plan, with or without a salary reduction agreement, are not the employee’s wages and are not considered income for Medicaid purposes. 3. Payroll deductions, treated as follows: a) Payroll deductions used to purchase Cafeteria-Plan benefits are the employee’s wages and are earned income. b) Example: Employees who want more than basic benefits contributed by the employer may pay additional costs through payroll deductions. The amounts of those voluntary payroll deductions are the employee’s wages and are considered earned income for Medicaid purposes. 1) Unless an exception applies, FICA will be deducted from these payroll deductions. 4. Cash received under a Cafeteria Plan is treated as follows: a) Cash received under a Cafeteria Plan in lieu of benefits is wages. b) However, cash received as reimbursement for qualified-benefit expenses, such a child care, is not income. c) Example: ABC, Inc., contributes $50 per week to fund basic benefits under a cafeteria plan. Mr. White selects insurance that costs $35 per week and opts for a weekly cash payment of $15 in lieu of additional coverage. The $15 cash payment is part of Mr. Brown’s countable wages. C. When a cafeteria plan is involved, countable wages for Medicaid purposes can be less than the gross amount on the check stub. It can be difficult to tell whether paystubs represent payroll deductions, which are part of gross wages, or cafeteria-plan itemizations, which are not. 1. One indicator is when the deduction for Social Security and Medicare taxes is less than the tax rate times the gross wages shown on the checkstub. 2. Example: The June 2010 monthly pay stub reflects gross wages of $999.94, a deduction for FICA/Medicare taxes of $68.85 (does not equal 7.65 percent of the gross wages) and a $160 voluntary deduction for health insurance. The employer confirms the company contributes $100 per month to fund basic benefit levels under a cafeteria plan that offers a variety of insurance coverages. The $100 that the employer contributes toward benefits under a cafeteria plan is not wages. Also, the employer confirms the employee voluntarily pays $60 for additional benefits. The employee’s contribution is wages.