Benefits in Hindsight

by Angela R. Garber

It’s the second question out of every potential new-hire’s mouth. Right behind salary, they want to know about benefits. In today’s market place, every employee expects 401k, profit sharing, and pre-tax flexible spending options, and businesses that don’t offer these extras just may lose top-notch employees who seek greener pastures.

What’s a business to do? Without a benefits manager on staff, managing it all in house can be cumbersome and time-consuming, if not downright impossible. Hiring a dedicated employee or a human resources consulting firm is too expensive for many small businesses. The question becomes outsource or automate? The answer is different for every business, but sometimes a combination approach fits the bill.

Many experts recommend that small businesses ­ specifically those with fewer than 100 employees or without a dedicated accounting department ­ outsource their payroll. They warn of the time consuming, paper wasting task of staying compliant with thousands of tax codes and adjusting deductions every time an employee hits a new tax threshold. But even for those who choose to follow this advice, it is entirely possible to outsource payroll while bringing some benefits in house for closer management.

It was the need for a “cafeteria plan,” also known as Section 125 or a pre-tax flexible spending plan, that prompted Branch-Smith Inc. to bring at least a portion of its benefits package in house. The Fort Worth, Tex.-based company is a 100-employee media firm with printing, publishing, promotional-product, and advertising operations.

Section 125 is the IRS code that allows employees to set aside pre-tax dollars from each paycheck to be used to pay for insurance premiums, dependent care, or medical expenses not otherwise covered by insurance. Spending pre-tax dollars for insurance premiums is the easy part ­ almost every business offers this option to its employees ­ but setting up a full cafeteria plan that also includes flexible spending options is a bit trickier.

Employees determine at the beginning of the year how much money they want to set aside for things like medical bills, prescription drugs, orthodonture, and even babysitting and nursery school. Money is deducted from their gross pay each month and set aside in a flexible spending account. As these expenses come up, employees pay the bills out-of-pocket and then submit applications for reimbursement. The real benefit of a cafeteria plan is that it acts as a tax shelter for both employer and employee, as neither is required to pay taxes on these dollars earmarked for eligible expenses. The same goes for other pre-tax benefits like 401k.

Accounting assistant Charlyn Taylor explains that Branch-Smith had tried just about every option to create an effective, efficient cafeteria plan, and that, in the end, bringing it in house was the best option. “We offered a cafeteria plan before, when [payroll and benefits] were set up through an outside human resources consulting firm, but we had problems,” says Taylor. “The checks and processing did not come in a timely fashion. The employees were unhappy. If you go out and buy glasses and expect to have your reimbursement, and it doesn’t get back to you on the date [it’s supposed to], you’re unhappy.”

“Then we switched to a CPA firm, but there were still problems,” she says. The CPA firm charged Branch-Smith a fee for each piece of paper that went back and forth. Eventually it got too costly.

Branch-Smith decided to outsource payroll to ADP and to bring the cafeteria plan in house with DATAIR software. Installation and setup of DATAIR software is as simple as placing the disk in the disk drive and typing “A: RUN.” And the creation of employee accounts can be done either manually by keying in each employee’s name and information, or, more often than not, by importing the data from an ASCII or spreadsheet-format file from payroll or other human resources systems.

At the first of each year, employees decide how many pre-tax dollars they want to contribute from each paycheck to be used in their flexible spending account. That information is entered into the program, and, like any other deduction, the money is taken out of each participating employee’s gross income and then kept in a company-managed fund to be distributed as it is needed.

“It’s a really simple kind of function,” says CEO David Branch. “At the first of the year we plug in how much each person has chosen to have deducted during the year. Then you’re submitting expenses against that, and being reimbursed for them, so it knows when you’ve run out of money.”

On the back end, the software calculates and keeps detailed information about contributions, reimbursements, processed claims, and all supporting accounting information. But on the front end it functions much like a spreadsheet, producing mail-merge documents concerning benefits and enrollment information to employees.

“It produces reports that we hand out each pay period that say, ‘This is how much you have had deducted from your pay so far this year, and how much will be presumed to be deducted throughout the rest of the year,’ ” says Branch. “And it lets you know ­ [information] that we try to publicize pretty heavily ­ how much you need to spend by the end of the year so you don’t lose that money.”

“I do the software,” says Taylor. “And with the exception of the first of the year setup, it’s a matter of an hour-and-a-half job on a bi-weekly basis to completely put in the contributions, and to send the checks for the disbursements.”

“As employees file their reimbursement request, the program processes the request and generates the check,” she says. “It has its own testing capabilities to make sure it’s not top heavy, and it has its own reporting at the end of the year that with a key stroke you can pull up reports needed to file with the IRS.”

The decision to bring the cafeteria plan in house has paid off. “By the time you apply the minimum of a couple hours to the effort of the payroll period ­ which for us is every other week ­ I know we were probably getting into a couple of thousand dollars a year just to shuffle the paper. Not to mention our own interfacing efforts,” says Branch of the costs of offering the plan with the assistance of the CPAs. “And [with the software] it’s just very simple to do.”

Experts estimate that the tax savings usually cover the costs to businesses of initiating and managing the plans for their employees. And fortunately, companies that might not otherwise have the time or resources to manage these benefits can do so through outsourcers like ADP and Paychex.

If you, like Branch-Smith, have the personnel to manage benefits more closely, bringing it in and automating with one of the human resources management systems may prove both cost effective and time efficient. But, if your managers are already time-constrained, outsourcing everything may be the best option. Whatever you choose, make sure you’re up to date on the tax codes. Because if the IRS isn’t happy, no one is.

Small Business Computing Staff
Small Business Computing Staff
Small Business Computing addresses the technology needs of small businesses, which are defined as businesses with fewer than 500 employees and/or less than $7 million in annual sales.

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