How does my client benefit from adopting a Premium Conversion Cafeteria Plan?
The biggest benefit is a reduction in Social Security and Medicare (FICA) taxes because annual payroll is reduced by the amount of premiums paid on a pre-tax basis. For example, assume your client has 20 employees enrolled in health insurance and each employee pays $1,200 a year in premiums, for an annual total of $24,000 in payroll deductions for premiums. If employees pay premiums with after-tax dollars, your client must pay 7.65% of the $24,000, or $1,836, in FICA taxes. If employees pay on a pre-tax basis under the Premium Conversion Cafeteria Plan, your client saves $1,836.
