Cafeteria Plan

(redirected from Section 125)
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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 ?
Here are five things to know about HSAs and Section 125 plans.
Employers that choose to allow employee pre-tax payroll deferrals into an HSA must establish a Section 125 plan (a plan that meets the requirements of Section 125 of the Internal Revenue Code).
Using section 125 plans for individual insurance is legally controversial, however, under both federal and state law (Hall and Monahan 2010).
Usually only larger employers offer cafeteria plans with a full menu of benefits, but Section 125 cafeteria plans can also be set up for a single purpose such as paying health insurance premiums.
The complementary policy--keeping the tax exclusion for employers but removing deductability of section 125 accounts--raises only $42 Billion and increases the number of uninsured by only one million.
Therefore the Committee has suggested that the definition of the word 'wife' in Section 125 should be amended so as to include a woman who was living with the man as his wife for a reasonably long period, during the subsistence of the first marriage.
A summary of TEI's recommended changes to the proposed section 125 cafeteria plan regulations is, as follows:
The only catch is, to get in on the pretax payment plans, employers will have to use or set up a Section 125 system to allow purchase of insurance through payroll deductions.
Employers should be encouraged to implement a Section 125 plan (also known as a cafeteria plan or salary reduction plan) to obtain these tax savings.
Some employers may think that HSA programs will be even better than their current Section 125 plans.
However, the voluntary salary reductions covered under the cafeteria-plan provisions of IRC section 125 are not considered constructively received and thus are not salary or wages for income tax purposes.
RECENT CHANGES TO SECtion 125 of the Internal Revenue Code could possibly make an already popular choice for reducing employees' out-of-pocket health care costs even more attractive.