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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.

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.
Copyright © 2008 H&R Block. All Rights Reserved. Reproduced with permission from H&R Block Glossary
References in periodicals archive ?
Employers may make contributions to their employees' HSAs without a Section 125 plan if the contributions are made directly.
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.
Product Strategy 2: Maximize the Benefits of a Section 125 Plan (For employed clients)
Employers who do offer a Section 125 plan must meet state requirements, including paying at least 33 percent of the premium.
Research by the Bureau of Labor Statistics for 1997 says that less than 4 percent of companies with fewer than 100 employees have Section 125 Plans. Smaller employers (fewer than 250 employees) cite cost and administrative complexity as the two biggest barriers to adding a Sectian 125 plan.
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).
Almost universally, larger employers deduct workers' portion of group insurance premiums through a section 125 plan, but this is done by only 30-70 percent of firms under 200 (depending on particular survey, year, and firm size grouping), according to national surveys.
We are fortunate to be able to offer several medical insurance choices for our employees and had been offering PPO plans with different deductibles and co-payments along with a flexible savings plan, which you may know as a Section 125 plan. In 2006, we introduced a plan with a very high deductible--currently $3,050 for an individual and $6,150 for a family.
A difference between line 1 and line 3 indicates that a person could be a participant in a 401(k) plan, a 403(b) plan or a Section 125 plan, or both.
The IRS issued its first notice in early January, which made it clear employees could not use HRAs to pay section 125 plan premiums without direct reimbursement documentation.