From: Somewhere in California

Hi TaxMama,

We're a small non-profit, a 501c5 not a 501c3, with four employees: an Executive Director, two full-time staffers and a part-timer (less than half time).

Instead of buying the same health-care benefits for everyone, we want to spend the same amount on benefits for each person in the way that helps them most, and spend a proportionate amount for the part-timer.

That is, we'd like to buy health insurance, or pay for uninsured medical costs, or put money into a 401k for each individual, at their request up to a set dollar amount.

In addition, we want to make a small contribution (maybe 3 or 5%, raising it later when we can afford it) to a 401k for each.

Can we do this? Is this what they call a cafeteria plan or a Section 125? How do we report this? Do we report the 401k contributions as taxable wages?

Thanks for your guidance!

Paul

 

Hi Paul,

That's a really interesting question.

I'm not sure I can exactly do it justice.

Do you have an outside payroll service? Most of them, like Paychex, ADP, etc. offer either insurance only plans or full cafeteria plans for a few extra dollars.

What I suggest that you do is poll all your staff to find out if they have the following costs in their lives and how much they spend:

• health insurance
• health care (medical, dental, visual)
• child or dependant care (including regular baby-sitting so they can work or study)
• their own education costs
• legal costs
• And do they want to put money away for retirement?
• And how much?

Armed with this, you can build an employee benefit plan, such that even after the administrative costs, the organization will save money overall - and those savings can be either retained or added to money you contribute towards the benefit of their choice.

Aside from the 401(k) plan, you might be able to get away with a SIMPLE, which requires the employer to pay 3% of the employees' wages as the employer's share of the contribution. The administrative costs are apt to be lower than a 401(k). And there's no testing for contributions by highly compensated employees, like there is with a 401(k) plan.

As to the medical, you might look at an HSA.

This would allow everyone to have their own plan, but the employer could contribute an amount towards it. I don't think there's much in the way of administration fees on these plans.

Of course, you can always contribute money to their own or their children's education IRAs. That would be tax-free income.

Booking the benefits? Well, it will all depend on the benefits.

Essentially, some of them will get added to the Social Security and Medicare wages, but not to the total taxable wages.

You're really going to need to spend a few bucks for a tax professional to set up the journal entries for you once you decide on the plans you need. Heck, it might be a good idea to include them in the planning.

You'll find payroll services here, and an explanation of how various benefits are treated on paystubs.

Decoding the mysteries of your pay stub can save you money, taxes.

This should keep you busy for a while.

Have fun!

Best Wishes,
Eva Rosenberg, MBA, EA