Cafeteria Plan

(redirected from Section 125 Plan)
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Cafeteria Plan

1. An employee benefit in which an employee may contribute so much of his/her pretax income into a special account that may be used for a broad range of purposes. One may use the funds in a cafeteria plan for matters such as medical expenses, life insurance premiums, or other things. This allows the employee to structure his/her employee benefits in a way that best suits their needs for a given period of time. For example, a young, healthy employee may have the ability to choose a less expensive, less comprehensive insurance plan than he/she might otherwise receive from an employer. It is formally called a Section 125 plan. See also: Flexible Spending Account.

2. An employee benefit plan in which employees may choose from multiple options. For example, an employee may choose among a health insurance plan with no deductible, one with a $500 deductible, or one with a $1,000 deductible.

Cafeteria plan.

Some employers offer cafeteria plans, more formally known as flexible spending plans, which give you the option of participating in a range of tax-saving benefit programs.

If you enroll in the plan, you choose the percentage of your pretax income to be withheld from your paycheck, up to the limit the plan allows. You allocate your money to the parts of the plan you want to participate in.

For example, you can set aside money to pay for medical expenses that aren't covered by insurance, for child care, or for additional life insurance coverage. As you incur these kinds of expenses, you are reimbursed from the amount you have put into the plan.

Since you owe no income tax on the money you contribute, you actually have more cash available for these expenses than if you were spending after-tax dollars.

However, you must estimate the amount you're going to contribute before the tax year begins, and you forfeit any money you've set aside but don't spend. For example, if you've set aside $1,500 for medical expenses but spend only $1,400, you lose the $100.

In some plans the deadline for spending the money in your flexible spending account is December 31. Other plans provide up to a three-month extension.

Cafeteria Plan

A plan wherein an employer offers a choice of salary or specified nontaxable fringe benefits from which participating employees may select. The plan may be funded with employer contributions, employee contributions (usually through salary reduction agreements) or a combination of both. Also called a section 125 plan.
References in periodicals archive ?
Governments that already have a Section 125 plan in place and offer personal health care or dependent care spending accounts to employees need to make sure they are promoting the benefit and educating employees about how to take full advantage of this resource.
Under ERISA, Department of Labor rulings and court decisions have clarified that individual insurance purchased through a Section 125 plan constitutes nongroup coverage as long as the employer does not contribute to the premium and does not otherwise endorse or promote the insurance.
With a Section 125 plan in place, employees can buy their health insurance through payroll deduction with pre-tax dollars.
Thirty-three cents of the increase will be used to provide more needed childhood immunizations, the healthcare plan for low-income Hoosiers, smoking cessation programs, and help for small businesses to offer health insurance to their employees; 3 cents for increased Medicaid provider reimbursement rates, 5 cents for other health initiatives, and 3 cents for Section 125 plans (a plan that allows employers and employees to purchase health insurance on a pre-tax basis).
The fees for the administration of this group's Section 125 Plan are about $2,000 per year.
The decision to adopt one type of Section 125 plan as opposed to another depends on the philosophy, needs, and employee benefits budget of the sponsoring corporation.
List-billing can be done without using a section 125 plan, but adding this tax advantage makes list-billing more attractive.
The advantages that are afforded by a Section 125 plan are that
In addition to the employee savings in federal (and possibly state and local) income taxes, both employees and employers avoid Social Security taxes on amounts deferred to a Section 125 plan.
But a properly structured Section 125 plan can offer just such an opportunity for accountants and their business clients.
Section 1 25 stipulates that 401 (k) cash or deferred compensation is the only type of deferred compensation that may be included in a Section 125 plan.
1 Provide an initial in-depth review of the existing Wake County group insurance programs and Section 125 plan.