U.S. BUREAU OF LABOR STATISTICS COMPENSATION AND WORKING CONDITIONS

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Pretax Benefits: Access to Section 125 Cafeteria Benefits and Health Savings

Accounts in the United States, Private Industry

by Eli Stoltzfus

Bureau of Labor Statistics

Originally Posted: March 28, 2007

In an effort to attract and retain employees, employers provide compensation packages that include wages and benefits.

Benefits that are paid for by the employer generally are not taxable to the employee. If benefits, such as group life insurance,

are paid for by the employee, generally the money used to pay for the benefits is taxable. In recent years, tax laws have been

created that permit certain benefits--such as defined contribution (401(k)) retirement benefits, section 125 cafeteria benefits, and health savings accounts--to be paid for with pretax money. Pretax benefits enable both employers and employees to set

aside money on a tax-free, salary-reduction basis for retirement expenses as well as for qualified dependent care and

healthcare expenses. As employers seek to keep the costs of employee benefits under control, and employees seek to

maximize their take-home pay, pretax benefits have become more prevalent.1

The National Compensation Survey (NCS) collects and publishes data on employee access2 to a number of pretax benefits,

including three types of section 125 cafeteria benefits: flexible benefits plans and two types of reimbursement accounts (also

called flexible spending accounts)--dependent care reimbursement accounts and healthcare reimbursement accounts. The

NCS also collects and publishes data on employee access to health savings accounts.3

Flexible benefits enable employers to offer benefit plans that allow employees to select from different plan options according

to their needs. Employees can select benefits that are of most value to them and forgo those benefits that are less important

to them. For example, an employee who already is covered by a spouse’s health benefit plan might choose only vision or

dental coverage from her employer; or a dual-earner family in which both the husband and wife are employed might require

funds to pay for childcare, which may not be covered by a one-size-fits-all benefits package.4

Dependent care reimbursement accounts set aside money to be used to pay for expenses including childcare, eldercare, or

services to a disabled dependent. Healthcare reimbursement accounts set aside money to be used to pay for out-of-pocket

medical expenses including deductibles, co-payments, and other healthcare costs not covered by health insurance.

Reimbursement account benefits can be part of a flexible benefits package, or they can stand alone.

Health savings accounts allow employees to set aside money to pay for future medical expenses. Health savings accounts

must be offered along with a high-deductible health insurance plan. Other features of health savings accounts include the

rollover of unused contributions, the portability of accounts, and tax-free interest.

The charts below show the percent of all workers with access to employer-provided section 125 cafeteria benefits as follows:

flexible benefits and reimbursement accounts as a whole in 1999; and flexible benefits, dependent care reimbursement

accounts, and healthcare reimbursement accounts in 2006. The charts also show the percent of all workers with access to

health savings accounts in 2005 and in 2006. Furthermore, the charts show the 2006 access rates for selected groups of

employees for section 125 cafeteria benefits and for health savings accounts.
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• Chart 1 shows that in 1999 employee access to section 125 cafeteria benefits for all workers was 7 percent for flexible

benefits and 15 percent for reimbursement accounts as a whole; and in 2006 employee access was 17 percent for

flexible benefits, 30 percent for dependent care reimbursement accounts, and 32 percent for healthcare

reimbursement accounts. • In 2006, the least prevalent section 125 cafeteria benefit was flexible benefits. Dependent care and healthcare

reimbursement accounts were more prevalent. This pattern holds true for all worker groups. As can be seen in charts

2 and 3, however, among different worker groups the rates of access varied widely.

• Chart 2 shows that employees who worked in establishments with 100 or more employees had relatively high rates of

access to each of the three section 125 cafeteria benefits--flexible benefits, dependent care reimbursement accounts,

and healthcare reimbursement accounts--while employees who worked in establishments with fewer than 100

employees had relatively low rates of access. • Chart 2 also shows that workers who were employed in metropolitan areas had access to flexible benefits at about the

same rates as those employed in nonmetropolitan areas; however, workers in metropolitan areas had higher rates of
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access to dependent care reimbursement accounts and to healthcare reimbursement accounts than did workers in

nonmetropolitan areas.

• Chart 3 shows that white-collar workers had access to section 125 cafeteria benefits at about the same rates as

workers earning $15 or more per hour, and that blue-collar workers had access at about the same rates as workers

earning less than $15 per hour.

• Chart 4 shows that employee access to health savings accounts for all workers was 5 percent in 2005 and 6 percent

in 2006.
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• Chart 5 shows that, in 2006, 9 percent of employees who worked in establishments with 100 or more employees had

access to health savings accounts, while 3 percent of employees who worked in establishments with 1 to 99 workers

had access to such accounts. • Chart 5 also shows that 6 percent of workers who worked in metropolitan areas had access to health savings

accounts and that 4 percent of workers in nonmetropolitan areas had access to such accounts.

• Chart 6 shows that 9 percent of white-collar workers and 4 percent of blue-collar workers had access to health savings

accounts; and 8 percent of workers earning $15 or more per hour and 5 percent of workers earning less than $15 per

hour had access to health savings accounts.

NOTE: Standard errors have not been calculated for NCS benefits estimates. Consequently, none of the statistical inferences

made in this report could be verified by a statistical test.

Eli Stoltzfus

Economist, Division of National Compensation Survey, Office of Field Operations, Bureau of Labor Statistics.

Telephone: (202) 691-6506; E-mail: Stoltzfus.Eli@bls.gov
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Notes

1 Ron Polaniecki, "Big Savings," Credit Union Management, August 2005, pp. 54-56.

2 As defined by the National Compensation Survey, an employee has access to a benefit plan if the employee is in an occupation that is

offered the plan. By definition, either all employees in an occupation have access to a benefit or none has access.

3 The advent of section 125 cafeteria benefits dates to the Tax Reform Act of 1978. Section 125 cafeteria benefits are subject to section 125 of

the Internal Revenue Code. For more information, see Title 26 of the Internal Revenue Code, on the Internet at http://www.gpo.gov/uscode/

title26/subtitlea_chapter1_subchapterb_partiii_.html. The advent of health savings accounts dates to The Medicare Prescription Drug,

Improvement, and Modernization Act of 2003. The Tax Relief and Health Care Act of 2006 provided additional health savings account benefits.

At the time of this writing, health savings accounts are subject to Revenue Procedure 2006-53. See 26 CFR 601.602: Tax forms and

instructions; on the Internet at http://www.ustreas.gov/offices/public-affairs/hsa/pdf/rp-2006-53.pdf. 4 Joseph R. Meisenheimer II and William J. Wiatrowski, "Flexible Benefit Plans: Employees Who Have a Choice," Monthly Labor Review, December 1989, pp. 17-22; on the Internet at http://www.bls.gov/opub/mlr/1989/12/art3abs.htm.

Data for Chart 1. Percent of all workers with access to Section 125 cafeteria benefits, 1999 and 2006

1999 2006

Flexible benefits 7 17

Reimbursement accounts 15

Dependent care reimbursement accounts 30

Healthcare reimbursement accounts 32

Data for Chart 2. Percent of workers with access to Section 125 cafeteria benefits by size of establishment and

geographic area, 2006

Flexible benefits Dependent care reimbursement accounts Healthcare reimbursement accounts

All workers 17 30 32

Establishments with 100 or

more workers 28 47 50

Establishments with 1 to 99

workers 8 15 16

Metropolitan areas 17 32 33

Nonmetropolitan areas 18 19 25

Data for Chart 3. Percent of workers with access to Section 125 cafeteria benefits by worker characteristics and wage

group, 2006

Flexible benefits Dependent care reimbursement accounts Healthcare reimbursement accounts

All workers 17 30 32

White-collar occupations 23 40 43

Blue-collar occupations 14 22 23

Average wage $15 per hour or

higher 24 43 45

Average wage less than $15

per hour 12 19 21
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Data for Chart 4. Percent of all workers with access to health savings accounts, 2005 and 2006

2005 2006

Health savings accounts 5 6

Data for Chart 5. Percent of workers with access to health savings accounts by size of establishment and geographic

area, 2006

Health savings accounts

All workers 6

Establishments with 100 or more workers 9

Establishments with 1 to 99 workers 3

Metropolitan areas 6

Nonmetropolitan areas 4

Data for Chart 6. Percent of workers with access to health savings accounts by worker characteristics and wage

group, 2006

Health savings accounts

All workers 6

White-collar occupations 9

Blue-collar occupations 4

Average wage $15 per hour or higher 8

Average wage less than $15 per hour 5

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