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The Flexible Spending Account (FSA) allows all employees to be treated equally and to have the same benefits plan made available to all employees. As part of the Section 125 regulations, the IRS provides an option whereby any monies remaining in the FSA at the end of the calendar year can be returned to the employee as taxable income. In order for an employee to appropriately budget what is necessary for any medical or childcare -related expenses, AFLAC will educate employees beginning late October as to how much money should be set aside for such expenses. The city will determine in December 2004 if the $5,000 allowances for medical and childcare expenses are sufficient. DISCUSSION/ANALYSIS: In order to legally function as a Section 125 plan (cafeteria plan) under the Internal Revenue Code, and because the plan allows for pre-tax dollars to be placed in a separate account, the City of Colton must approve and adopt a resolution to be filed with the Internal Revenue Service. Once the resolution is adopted, AFLAC will file the required documents with the IRS on behalf of the city. AFLAC is the largest provider of Section 125 benefit plans in the nation. Currently, they are assisting many agencies—public and private—with this type of plan. AFLAC has agreed to perform these duties without assessing an administrative fee. Because the FSA allows employees to set aside pre-tax dollars to purchase supplemental coverage, there are financial advantages to employees participating in the plan as well as to the City of Colton. Those employees who participate in the program will realize savings through lower federal and state taxes; as a result, the city can realize lower payroll taxes. FINANCIAL IMPACT: There may be a minor cost impact for FY factor). The costs are attributed to those allowance of $654.46. As previously stated, ENVIRONMENTAL IMPACT: There is no environmental impact. 2003-04, which is not readily quantifiable (but not a bargaining groups who are capped at the Health Net AFLAC will waive the administrative fee. CONFLICT OF INTEREST – Gift Disclosure Requirements American Family Life Assurance Company President: Daniel P. Amos, Chairman and Chief Executive Officer Contact: John R. Cuevas, District Sales Coordinator RECOMMENDATION: Staff recommends that members of the City Council approve and adopt the proposed resolution, establishing a Section 125 plan (cafeteria plan) and allowing employees to set aside pre-tax funds in a Flexible Spending Account (FSA) under the IRS Section 125 cafeteria plan. Attachment: Resolution Prepared by: Anthony Arroyo, Administrative Analyst II REVIEW TEAWONLY,f/J Clty Attorney: Com` Finance Director• ' City Manager: OTHER: