The information posted on PayrollTalk is for informational purposes only and is not intended to substitute for obtaining accounting, payroll, tax, or financial advice from a professional accountant.

AFLAC Plans & 125 Cafeteria Plan Benefits

Can anyone tell me whether or not the following AFLAC Plans fall into a Cafeteria 125 Plan in regards to being exempt from FIT,FUTA, and FICA taxes:
1) Personal Accident Indemnity Plan
2) Personal Cancer Indemnity Plan
3) Voluntary Indemnity Plan (Hospital Confinement Indemnity Insurance)

Comments

  • I agree with David - My impression of the AFLAC plans is they they are not health insurance, but pay a certain amount of cash if you are whatever the policy covers (in the hospital, have cancer, injured in an accident) so they are not paying medical expenses per se, but are more like disability insurance.
  • From the IRS website:

    http://www.irs.gov/govt/fslg/article/0, ... 20,00.html

    How does a cafeteria plan work?

    Employer contributions to the cafeteria plan are usually made pursuant to salary reduction agreements between the employer and the employee in which the employee agrees to contribute a portion of his or her salary on a pre-tax basis to pay for the qualified benefits. Salary reduction contributions are not actually or constructively received by the participant. Therefore, those contributions are not considered wages for federal income tax purposes. In addition, those sums generally are not subject to FICA and FUTA. See Sections 3121(a)(5)(G) and 3306(b)(5)(G) of the Internal Revenue Code.

    The above discussion provides only the most basic rules governing a cafeteria plan. For a complete understanding of the rules, see the Proposed Regulations under Code section 125.


    So from what I pasted above I think it is saying since the employee isn't actually receiving the pay and it is going directly to the Plan Provider it is technically not income? When AFLAC enrolled our employees the representative told us it would be considered a Cafeteria Plan even though we (the employer) were not contributing only the employee
  • My question about AFLAC is about the cash benefit plan. I have my clients (cafeteria) plan documents which the AFLAC rep drew up and provided me with a copy of, but when I questioned the rep about the cash benefits received after a claim is appoved, he stated emphatically that the paid out cash benefits were not reported as a taxable benefit. My understanding is that these AFLAC plans are more like a disability payment and the funds received may be used for any purpose. How can the premiums be paid pre-tax and the benefits received be tax free? Anyone have any feedback?
  • Hello Pamela,

    Do the plan documents specify which AFLAC plan is involved?

    The AFLAC policies for individuals (after tax) pay a cash benefit - including short term disability.

    Checking the AFLAC website (business tab/Cost Savings button) they also offer several benefit plan programs - the cafeteria (Section 125) plan section discusses flexible spending arrangements and POPs (Premium Only Plans). There are also plans for commuter spending accounts and HSA/HRA programs. http://www.aflac.com/business/default.aspx

    The benefits from flex spending accounts would be excluded from income even though paid with pre-tax dollars.

    Given that most of what we hear from the AFLAC reps is about cash payments under specified circumstances, I was also under the impression that payouts from employer provided insurance would be similar to short term disability, however it does not look like AFLAC offers short term disability as a cafeteria plan option.

    I am surprised the rep did not pick up on the confusion over the type of benefit being offered. You may want to verify that it is a flex spending or POP arrangement for medical insurance.
  • d26kd26k ✭✭✭
    I always answer this question with something along the lines of:

    AFLAC is a brand name, not a tax code reference. The plan provider should be able to provide you with the plan(s) documentation, including the relevant documentation and references showing how each part of your plan should be handled in regards to payroll calculation and reporting, both for federal purposes, and for state purposes (make sure to specify the state or states where you to file payroll returns).

    Your plan provider has likely included a management fee to properly setup, monitor, and support your benefit plan(s), so don't hesitate to ask!
  • Can you cancel an Aflac plan outside of open enrollment?
  • I tried to cancel my Aflac, and I got this letter from them stating that I can't cancel because of the cafeteria plan. What if I was laid off, and when is my open enrollment.

  • Hello Nancy,
    By definition a Section 125 or cafeteria plan is an employer plan where your employer provides you with certain benefits, but you have the option to select among the benefits. One of those options is to receive cash. That is, the plan must offer two or more benefits, one of which is cash. For benefits that, if paid for by the employer, are excluded from gross income, such as medical insurance, a medical flexible spending account, or group term life insurance coverage up to $50,000, there are couple of ways this may be handled.

    One is that the employer provides all three benefits. However, if you already have, for example, medical insurance from another source, for example through your spouse's employer, you may have the option to receive a cash payout in place of the heath insurance you don't need - or you can apply the "cash" to other benefits.

    In another situation, you might need the medical benefit, but the employer only pays for part of it. In this case, you can elect to reduce your salary by the amount of your part of the payment and that becomes "employer paid" because the employer provided the benefit in exchange for your reduced salary.

    With group term life insurance, you may make a pre-tax contribution (salary reduction) which, like the medical insurance contribution, becomes "employer provided" and is excluded from income as part of the first $50,000. The cost (per the IRS table) of amount of coverage above that becomes taxable income to you. If you contribute after tax dollars instead of pre-tax dollars, that is a direct reduction of any taxable portion of the cost of coverage in excess of $50,000.

    If the benefit is a Medical FSA paid for through salary reduction - say $2,400, the employer collects the salary reduction through the year ($200 per month) through pretax payroll deduction. However, if you use up the $2,500, before you are laid off, the employer cannot continue the payroll deductions, however, since the employer provided you with a $2,500 benefit, the employer is not able to recover any amount that was spent under the plan in excess of your actual contributions. For example, if you used $2,000 for medical expenses before being laid off, but only paid in $800, the employer cannot recover the $1,200 from you. On the other hand, if you paid in for the entire year ($2,400) but only used $1,600 for medical expenses, you could not recover the $800 remaining in the account because that became your employers money when you set up the salary reduction. That is two sides of the "use it or lose it" concept - both the employer and the employee assume some risk that the account will not come out even.

    As discussed earlier, (in 2011 to be specific, since we don't know what kind of AFLAC product you have or how your 125 plan is set up, we can't tell you what happens when you are laid off. In some cases, the benefits terminate, in other cases, the benefits continue and the cost is paid by the employer, sometimes with an opportunity for the employer to recover the the amounts when the employee comes back to work. Sometimes the the employee has the opportunity to make after tax payments to the employer to keep the benefits in effect, and sometimes the benefits terminate because the the employment relationship has been terminated.
    If the benefits are terminated, you no longer have to pay for them.

Sign In or Register to comment.