This will put them on the same footing as 401k contributions - exempt from Federal and (most) state income taxes.
Kelly Shearin
Published: May 9, 2005
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The Joint Committee on Taxation of Congress has issued a recommendation
to impose Social Security and Medicare taxes on cafeteria plans and
other pre-tax benefits. This proposal would increase taxes for employees
and employers alike, increasing the costs of health care and other
benefits; resulting in the possibility of more people becoming uninsured
due to increased costs. The JCT's report proposed that eliminating
cafeteria plan FICA savings would raise approximately $164 billion over
10 years.
The impact this change could have on employees and small employers alone
is staggering. As health insurance costs continue to skyrocket, pre-tax
benefits remain one way for employees, as well as employers, to afford
coverage and absorb annual cost increases.
Half of the amount, $82 billion, would be coming directly out of the
pocket of employees. Employees are already struggling with rising
medical costs and new plan designs that require higher co-pays and
out-of-pocket expenses. An employee making $20,000 is able to increase
her take-home pay by $1,530 per year using the FICA exclusion.
The other half of the $82 billion would come from employers, who deal
not only with the rising cost of providing benefits for their employees,
but now losing any tax advantage to offering these benefits.
Cafeteria plans not only allow employees to pre-tax their insurance
premiums, but also allows for the employee to set aside additional funds
in flexible-spending accounts to help pay for expenses that aren't
covered under their insurance plans. As employers are forced to
restructure benefit plans with higher out-of-pocket limits and co-pays
so they can afford to offer care, employees are forced to pick up a
bigger portion of the out-of-pocket expense not covered by the new
plans. The flexible-spending account is one way to offset some of the
additional cost, but this benefit would also be lost. At a time when so
much has been accomplished in the area of cafeteria plans and health
savings accounts, employers must band together to prevent this
legislation from passing.
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