Why Not a Cafeteria Plan?
A cafeteria plan is a menu of employee fringe benefits from which an individual employee can select those benefits that she can use or would prefer up to a predetermined dollar limit or a percentage of the employee's salary. It is an allowable limit rather than a bonus or grant, and an unused monthly portion is not normally carried forward. Paid vacations, holidays, sick leave benefits, and retirement plan contributions are usually considered separately. The cafeteria plan may include benefits such as medical, dental, and optical insurance, and expenses in those three areas not covered by insurance. It could also include life insurance, uniform allowance, and continuing education.
A recent fringe benefit worthy of consideration is child day care. Including this benefit in the cafeteria package broadens the field of search and makes employment available to someone who might otherwise find it difficult or impossible to work. At the present time, a very large number of mothers, both married and single, are locked into the work force out of economic necessity. Without this benefit, they would be hard pressed to make ends meet. Some outstanding candidates could be included in this group.
Child day care benefits may also make it possible for a present valuable employee in the practice to return to work a reasonable time after delivery, when she might otherwise not be able to afford to return to work or be forced to seek employment with a firm that does offer child day care benefits.
A cafeteria plan can be the most equitable benefit plan because it permits an employee to use her allowance for benefits that she really needs and in the amount of her choice, within the limits of the program. Thus, if an employee chose to use all her benefit for child day care or for medical insurance, she could maximize her use of the allowance in the area of her choice.
While an employee may have no need for major medical insurance because she is covered adequately under her husband's benefit at his place of employment, the contributions toward payment of the deductible and other expenses not covered in that policy can be a valuable benefit. Optical benefits can also be important. It is shocking how few orthodontic practices provide for dental benefits. In a cafeteria plan, it is easy to include all of these options.
Thus, an employee who has no need for either major medical insurance or child day care can receive substantial benefits to cover life insurance; excess medical, drug, optical, and dental expenses; uniform allowance; and continuing education expense. And the plan need not be limited to those benefits. It can be drawn to include any legitimate reimbursement, since such inclusions do not alter the total outlay of the practice on behalf of the plan.
Fringe benefits are a superior method of compensation of employees, because they are not taxable to the employee and are deductible to the practice. Each dollar of fringe benefit means more to the employee than a dollar of salary or bonus, because the benefits are not taxable, while salary and bonus are. As a matter of fact, improving the dollar amount of fringe benefits will usually be superior to some or all of a salary increase or bonus. This is such an attractive idea that the federal government is considering taking action to put a cap on the deductibility of fringe benefits.
Fringe benefits as compensation are more attractive to the employer as well, because they are a deductible expense and not subject to income tax withholding, FICA and unemployment insurance payment, Worker's Compensation insurance premiums, and retirement plan contributions. It is also interesting that in a professional corporation, the doctor is an employee and entitled to the fringe benefits in the cafeteria plan on the same basis as any other employee. Since the doctor is in a higher tax bracket than his or her employees, the fringe benefits package is even more valuable to the doctor than to the employees. This does not preclude an employment agreement under which the doctor may be entitled to special benefits such as "key man" life insurance and automobile use and maintenance.
It has been estimated that it costs about $4,600 a year on the average to own a 1983 four-door, six-cylinder car and operate it 15,000 miles a year. One option the doctor has is to own the car himself and take a deduction for business use. The IRS has increased the amount of this deduction by half a cent in 1983 to 20.5 cents per mile, in spite of the fact that the actual average cost appears to be 30.7 cents a mile. Another option is to have the professional corporation own the car and pay for its maintenance. The corporation can take deductions on the car for depreciation and for operating expenses, and the doctor can reimburse the corporation at the IRS rate of 20.5 cents a mile for pleasure driving. While the doctor may benefit most from the insurance, automobile, and retirement plan benefits, he also can realize substantial benefits from the cafeteria plan in his practice.
Cafeteria plan benefits should be looked upon as a major tool for sharing the financial success of the practice and contributing to employee satisfaction. Practices with higher fringe benefits have higher incomes and lower employee turnover rates. It would be difficult to say that there was not at least some cause-and-effect relationship involved.
Orthodontists would do well to realize the value of fringe benefits to their employees and to themselves, and install a cafeteria plan with a broad menu of benefits and an appropriate limit. The plan should be reevaluated annually, both for the benefits on the menu and for the dollar limit of the program.
