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 ?
1 A Section 125 plan is just one of several ways for employers to help employees with funding their HSAs.
Section 125 plans also allow employees to make before-tax contributions to personal spending accounts that can be used for qualifying health-care or child-care expenses.
Employees are free to pay their own premiums through after-tax payroll deduction, but if workers' wages are run through a Section 125 plan, by definition they convert to implicit employer contributions.
Employers who do offer a Section 125 plan must meet state requirements, including paying at least 33 percent of the premium.
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.
The Tax Reform Act of 1986 did nothing to alter their tax advantages; in addition, the Budget Reconciliation Act of 1987 did not follow through on earlier threats to cap Section 125 plan benefits.
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).
List-billing can be done without using a section 125 plan, but adding this tax advantage makes list-billing more attractive.
Texas and Kentucky regulators recently put out bulletins suggesting that they may apply group health requirements to list-bill arrangements if workers use Section 125 plan funds to pay the premiums, or even if employers simply give employees cash and encourage them to use the cash to buy individual health coverage.
The advantages that are afforded by a Section 125 plan are that
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.
But a properly structured Section 125 plan can offer just such an opportunity for accountants and their business clients.