Section 125 (Cafeteria) Plans

Cafeteria Plans – also known as Flexible Benefit Plans, Premium Only Plans (or POP Plans) and Section 125 Plans allow employees to pay for certain benefits with pretax dollars. This allows savings on taxes and insurance premiums, out of pocket health care and/or related child or dependent care expenses. Any dollar the employee defers into the flex plan is withheld before any taxes are calculated. The employer will save their portion of social security tax, Medicare, payroll and any other state-required taxes.  Workers Compensation premiums are also reduced in California because covered payroll is lowered.

The employee may elect to participate in any of three accounts. Federal, State and Social Security taxes are saved on every dollar contributed to the plan.

 

  1. PREMIUM ACCOUNT allows employees to pay their group insurance premium contributions pre-tax, increasing their take home paycheck;
  2. HEALTH CARE SPENDING ACCOUNT allows employees to use pre-tax monies to cover deductibles, co-pays, coinsurance and other non covered expenses;
  3. DEPENDENT CARE SPENDING ACCOUNT allows employees to save taxes on child or dependent care expenses.

For those interested in reading details from the IRS, here’s the link to their applicable publication:  IRS Publication 15B

Cafeteria Plan FAQs

Q. What is a Section 125 Plan?

A. Section 125 is a provision of the Internal Revenue Code that allows employees to pay their share of the cost of certain group insurance benefits, un-reimbursed medical expenses, and dependent care expenses with pre-tax dollars. Under this provision, your paycheck is reduced by the amount you elect for the year. That money is removed from your salary structure before Federal Income, State Income, and Social Security taxes are calculated, and placed in a separate account. This results in lower taxable income, and higher take-home pay. There are various options:
  • Premium Payment Account (Sometimes offered by itself, also called a “Premium Only Plan” or POP)
  • Medical Reimbursement Account (or Flexible Spending Account)
  • Dependent Care Reimbursement Account

 

 

Q. How does a Premium Payment Account work?

 

 

A. A Premium Payment Account allows you to have your contributions toward certain group insurance benefits deducted automatically from your paycheck, before taxes are calculated.  Premiums for domestic partners may not be taken on a pre-tax basis.

 

 

Q. What is a Flexible Spending Account?

 

 

A.Under this provision, you elect an annual amount to be taken out of each paycheck, pre-tax. These funds are available to reimburse you for out-of-pocket medical, dental, and vision expenses, such as deductibles and co-payments.  Any amount allocated but not used may be lost (The “use it or lose it” language).  Cosmetic services are generally not allowed, so you won’t get teeth whitening, or veneers, face-lifts, nose jobs or “boob jobs” paid through this account.  The IRS publishes a list of allowed expenses.  Employers will place a maximum amount for this account.

 

 

Q. What is the Dependent Care Reimbursement Account?

 

 

 

A. The Dependent Care Reimbursement Account allows you to pay for your childcare or disabled adult care expenses while you are working, with tax-free dollars.  There are federal guidelines as to the maximum amount which can be run through the account, and there are rules about coordination between spouses if both work.

 

Q. What is the plan year?

 

 

A: Your specific plan year is specified in the Plan Information Summary. It does not have to be the same as the calendar year, and, if this is the first year of the plan, it may be shorter than 12 months. Remember to consider these facts when making your annual elections.

 

Q. Are there any limits to the amount I can set aside for reimbursement?

 

 

A. Every plan is different. Your employer sets the limits on your plan.  The recent Health Care Reform Legislation imposes additional limits.

Q. Can I make changes in my election or drop out before the end of the plan year?

 

 

The only time tax law regulations will allow you to make a change is if there is a change in your family or employment status affecting a need for a benefit. Some examples of status changes are: marriage or divorce, the death of a spouse or child, the birth or adoption of a child, or a change in pay or hours of employment for you or your spouse.

 

 

 

 

 

 

 

 

 

 

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