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The Benefits of Employee Benefit Plans

April 25, 2006

Many employers view employee benefits as a necessary evil. What these employers often fail to realize is that benefits need not be expensive, and can reduce taxes, lower other costs, and motivate employees. Here are a few benefits that may be valuable to employees and save the employer money:

1. Cafeteria Plans.

A cafeteria plan allows an employee to pay his or her share of health insurance premiums on a pre-tax basis. The employee is not subject to income taxes on the payments, and neither the employer nor the employee pays Social Security or Medicare taxes on those amounts.

If the employer adds a dependent or health care flexible spending account feature to the plan, the employee can defer a portion of his or her wages to the account and use it for pre-tax reimbursements of dependent or health care expenses. Any unused amounts at the end of the year revert to the employer, which can use them to offset its minor administrative costs.

2. Wellness Programs.

Some of the most expensive medical problems to treat are preventable. To head off these problems, many employers implement "wellness" programs, such as free physical examinations, smoking cessation programs, and health risk assessments. Studies have shown that wellness programs generally are successful at reducing medical expenses and employee absenteeism. One study found that every $1 spent on a wellness program can reduce an employer's health plan expenses by up to $3.

3. Medical Reimbursement Plans.

Under a medical reimbursement plan, an employer reimburses eligible employees' medical expenses on a tax-free basis and the employer receives a deduction for the payments. Employers can limit eligibility to full-time employees or those with certain tenure. Many employers establish medical reimbursement plans to reimburse employees' deductibles and co-payments, and then negotiate higher deductibles for their major medical plans, which usually results in lower premiums.

These plans should be particularly attractive to C corporation owners who have few employees. (S corporation owners and LLC members generally may not participate in this type of plan.) With a medical reimbursement plan, a C corporation owner can receive tax-free reimbursement of medical expenses and a corporate deduction for the payments. Without a plan, the owner's individual deduction may be limited to those medical expenses which exceed 7.5% of adjusted gross income. A medical reimbursement plan must have a plan document, but it is relatively easy to establish one.

4. Stock Ownership.

An individual may be able to use his or her accumulated 401(k) balance or individual retirement account (IRA) to capitalize or purchase a new or existing C corporation. To do so, the individual needs to "roll over" his or her 401(k) account or IRA into a special profit-sharing plan which is sponsored by the new or existing entity. That portion of the individual's profit-sharing plan account is then invested in company stock. To motivate employees, the employer can contribute shares of its stock to participants' plan accounts. There are a variety of legal minefields associated with using a profit sharing plan to hold company stock, so any interested party should first speak with an employee benefits attorney.

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