Question

Cafeteria plans _______.

A) Are only for health care reimbursements.

B) Provide after-tax money for reimbursements.

C) May reimburse nondeductible expenses, such as nonprescription drugs, if they are prescribed by a doctor.

D) Are the same as an HSA.

Answer 1

A icafeteria iplan iis ia iseparate iwritten iplan imaintained iby ian iemployer ifor iemployees ithat imeets ithe ispecific irequirements iof iand iregulations iof isection i125 iof ithe iInternal iRevenue iCode. iParticipants iin ia icafeteria iplan imust ibe ipermitted ito ichoose iamong iat ileast ione itaxable ibenefit i(such ias icash) iand ione iqualified ibenefit.

A iqualified ibenefit iis ia ibenefit ithat idoes inot idefer icompensation iand iis iexcludable ifrom ian iemployee’s igross iincome iunder ia ispecific iprovision iof ithe iCode, iwithout ibeing isubject ito ithe iprinciples iof iconstructive ireceipt. iQualified ibenefits iinclude ithe ifollowing:

§ Accident iand ihealth ibenefits i(but inot iArcher imedical isavings iaccounts ior ilong-term icare iinsurance)

§ Adoption iassistance

§ Dependent icare iassistance

§ Group-term ilife iinsurance icoverage

§ Health isavings iaccounts, iincluding idistributions ito ipay ilong-term icare iservices

§ The iwritten iplan imust ispecifically idescribe iall ibenefits iand iestablish irules ifor ieligibility iand ielections.

The iplan imay imake ibenefits iavailable ito iemployees, itheir ispouses iand idependents. iIt imay ialso iinclude icoverage iof iformer iemployees, ibut icannot iexist iprimarily ifor ithem. iSee ithe iquestions ibelow ifor itreatment iof ibenefits imade iavailable ito iindividuals iwho iare inot ispouses ior idependents iof ithe iemploye iEmployer icontributions ito ithe icafeteria iplan iare iusually imade ipursuant ito isalary ireduction iagreements ibetween ithe iemployer iand ithe iemployee iin iwhich ithe iemployee iagrees ito icontribute ia iportion iof ihis ior iher isalary ion ia ipre-tax ibasis ito ipay ifor ithe iqualified ibenefits. iIn iaddition, ithose isums igenerally iare inot isubject ito iFICA iand iFUTA.

A isection i125 iplan iis ithe ionly imeans iby iwhich ian iemployer ican ioffer iemployees ia ichoice ibetween itaxable iand inontaxable ibenefits iwithout ithe ichoice icausing ithe ibenefits ito ibecome itaxable. iA iplan ioffering ionly ia ichoice ibetween itaxable ibenefits iis inot ia isection i125 iplan.

A iSection i125 iCafeteria iPlan iis ian iemployer-sponsored ibenefits iplan ithat ilets iemployees ipay ifor icertain iqualified imedical iexpenses i– isuch ias ihealth iinsurance ipremiums i– ion ia ipre-tax ibasis. iIt’s icalled ia i“cafeteria iplan” ibecause, ilike iwalking ithrough ia icafeteria iand iselecting ivarious idishes ito ieat, iemployees ican ichoose ithe itypes iof ihealthcare ioptions ithey iwant, isuch ias imedical, idental, ivision iand iother ibenefits, iand idecline ithe iones ithey idon’t.

In iaddition ito ithe ihealth ibenefits, iemployees ienjoy ilower itaxes.. iFor iemployers, ithey ipay iless isince iemployees ionly iselect ithe ibenefits ithey iwant irather ithan ithe iwhole ispectrum iof iofferings.

The iprimary iadvantage ito iemployees iis ithe irange iof ihealthcare ioptions ithat iallows ithem ito iuse iSection i125 imoney ito ifit itheir ineeds.. iIf ithey idon’t iwant iany iof ithe ioffered ibenefits, ithey imay ibe iable ito ichoose ialternatives; ioptions imay iinclude icash ior iother itaxable ibenefits, ilike isupplemental ilife ior idisability iinsurance.

It’s iimportant ito inote ithat ia iSection i125 iCafeteria iPlan idoes inot iprovide ihealth iinsurance.

Section i125 iCafeteria iPlan iRequirements

To iqualify ias ia iCafeteria iPlan, ithe iplan imust iinclude:

§ At ileast ione itaxable ibenefit ioption i(considered ipart iof ithe iemployee’s isalary), iand

§ At ileast ione iqualified ipre-tax ibenefit

An iexample iof ithe itaxable ibenefit ioption icould ibe iallowing iemployees ito itake ithe imonthly iamount ias ipart iof itheir isalary irather ithan iapplying iit itowards ithe ibenefit iplan. iWith itraditional icompany-sponsored ihealthcare iinsurance, ithe iemployer igenerally ipays ipart iof ieach iemployee’s ipremiums. iIf ian iemployee iopts iout iof ithe iplan, ihe ior ishe idoes inot ireceive icompensation ifor ithe iamount itheir ipremiums iwould ihave icost. iWith ia iSection i125 iCafeteria iPlan, ihowever, ithe iemployer imay ichoose iin ithis isituation ito ioffer ithe icost iof ithe ibenefits ias icash. iThe iemployee imay iuse ithe imoney itowards ianother ibenefit; ithough, iif ithe iemployee ireceives icash, ithat imoney iis itaxed.

Qualified ipre-tax ibenefits ican irange ifrom ihealth iand idisability iinsurance ito iFlexible iSpending iAccounts i(FSAs), iDependent iCare iAssistance iPlans i(DCAP), iHealth iSavings iAccounts i(HSAs), iand icontributions itoward iretirement iplans.

The iBig iThree iBenefit iAccounts ifor iEmployees

The ifollowing iSection i125 iCafeteria iPlan ifeatures ioffer iemployees isignificant itax iand imoney-saving iadvantages:

A. Flexible iSpending iAccounts i(FSAs). iAn iFSA iallows iemployees ito ipay ifor iqualified iout-of-pocket imedical iexpenses ion ia ipre-tax ibasis. iIf ithe iFSA iis ithe ionly ibenefit iprovided, iemployees imay iuse ithe iaccount ito icover ihealth iinsurance ipremiums.

B. Health iSavings iAccounts i(HSAs). iLike ian iFSA, iHSAs ienable ipeople ito iset iaside ipre-tax imoney ifor ia iwide ivariety iof iapproved ihealthcare iproducts iand iservices. iUnlike iwith iFSAs, iemployees iown ithe iaccount iand ican itake iit iwith ithem ianywhere ithey igo.

C. Dependent iCare iAssistance iPlan i(DCAP) iFSAs. iA iDCAP iallows iemployees ito iset iaside iup ito i$5,000 ia iyear ipre-tax ito ipay ifor idependent icare iservices. iThis iallows iworking iparents ithe iability ito isave ion ichild icare iwhile ithey iare iat iwork ior iattending ischool.

Benefits ito iEmployers

Section i125 iCafeteria iPlans ialso iprovide iseveral iimportant iadvantages ito iemployers, iespecially ithose iwho iown ia ismall ibusiness.

§ Reduced ipayroll itaxes ifor iemployees iwho iparticipate iin ithe i125 icafeteria iplan.. iLower ipayroll itaxes ican ialso ihelp ireduce ior ieliminate ithe icosts iof ioffering ithe icafeteria iplan.

§ More iattractive ibenefits ipackage, iwhich ican ireduce iturnover iand iattract inew italent.

Of icourse, ino iplan iis iperfect. iSection i125 icafeteria iplans ivary idepending ion ithe iemployer’s ineeds. iThey ican ialso ibe ifairly icomplicated ito iput itogether iand iadminister. iThe iplans ilock iemployees iinto itheir idesignated icontributions ifor ia ifull iyear; iwith ifew iexceptions, iemployees imust iwait iuntil ithe ifollowing ienrollment iseason ito imake iplan ichanges. iIf iemployees idon’t iuse iall itheir iFSA imoney iin ithe icalendar iyear, ithey ican ionly iroll iover ia imaximum iof i$500 ito ithe inext iyear; ialso, iunused iFSA imoney imay ibe iforfeited iif itheir iemployment istatus ichanges.

A isection i125 icafeteria iplan ioffers ia icost-effective ibenefits iplan ifor icompanies; iit ican ihelp ibusinesses isave imoney iwhile ikeeping iemployees ihappy. i iDue ito ithe icomplexity iof ithese iplans iand itheir icompliance iissues, icontact ia ibenefits iadministration iprofessional iwho ispecializes iin icreating iand iadministering ithese itypes iof iplans.