Cafeteria 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 ?
One of the most popular cost-savings strategies government finance officers use today is the Section 125 plan.
Using section 125 plans for individual insurance is legally controversial, however, under both federal and state law (Hall and Monahan 2010).
Prior to PPACA, several states sought to capitalize on the tax advantages of Section 125 plans by requiring or encouraging all employers to offer a cafeteria plan for the pre-tax payment of health insurance premiums, even if the employer did not sponsor a group health plan (Hall, Hager, and Orentlicher 2010).
Provides a tax credit for small employers for the cost of implementing a Section 125 Plan ($50 per employee; capped at $2,500)
Kingsdale said it will take a lot of effort to get consumers and employers to rethink their approach to Section 125 plans.
Rashke is Chief Executive Officer of Total Administrative Services Corporation (TASC), an employee benefits company that develops and markets Section 105 Plans, Section 125 Plans, pension plans and financial aid planning to small business owners.
There are a number of common misconceptions regarding "premium conversion" Section 125 Plans.
At the same time, regulations governing Section 125 plans have become more restrictive as the need for benefit restructuring has extended beyond welfare benefits to retiree benefits, including retiree medical.
In three states, Mark Hall studied the use of section 125 plans to allow tax-free premiums for individuals to purchase insurance who work for small employers.
We look forward to saving Bay Cities Bank commercial clients the hassles of managing payroll and payroll taxes, as well as offering them a variety of important related services such as 401(k) plans, section 125 plans and workers' compensation insurance.
In the public sector, Section 125 plans have been used mainly to establish tax-free benefits that are financed entirely by employees through salary reduction.
Human resource services include 401(k) plan recordkeeping, health insurance, workers' compensation administration, section 125 plans, a professional employer organization, time and attendance solutions, and other administrative services for business.