A Guide to Section 125 Cafeteria Plans
Employees should be required to authorize their elections and any midyear status changes that they are permitted to make under the terms of the plan documents, and evidence of their authorizations should be retained. Both written and electronic elections are permitted by Sec. 125, and employers should maintain systems for retaining employee authorizations and proof-of-eligibility documents required for status changes. Under the uniform coverage rule, the full amount of reimbursement available under a health FSA (less amounts previously reimbursed for the plan year) must be available throughout the plan year. This rule does not apply to dependent care or adoption-assistance benefits. Though only employees may participate, spouses and dependents may benefit from the plan. Individuals who are self-employed, such as sole proprietors or partners in a partnership, and individuals who are 2% shareholders in an S corporation, are not employees for this purpose.
- For benefits such as pension and medical aid, some employers contribute different amounts for employees depending on their level in the organization.
- Some small businesses don’t realize that plan documents are required.
- The Cafeteria Plan can include a Premium-Only Plan (POP) for balance-of-premium payments and supplemental benefits, while employees use the ICHRA for individual coverage premiums.
Under the new ruling, an employee who participates in a Flexible Spending Account plan ending December 31 can still receive reimbursement for claims incurred through March 15 if the extended grace period is adopted by the employer. If an employee chooses a non-qualified benefit, whatever money is used to pay for the benefit is taxed as salary at the employee’s usual rate. And, of course, if the employee receives cash instead of a qualified benefit, he or she has to pay taxes on that as income as well. However, some employees would rather allocate the money for these benefits to other expenses that they have. Also, employees are only allowed to change the benefits they select once a year.
The many rules surrounding cafeteria plans can make them hard to administer, especially for small employers. Companies that want to offer these plans can get assistance from a payroll service, professional employer organization (PEO) or insurance broker. With their help, employers can use Section 125 plans to affordably offer employees desirable benefits like health insurance and childcare assistance. If health insurance is the only benefit, this can be called a premium-only plan. This is also called a premium conversion plan” or a “premium reimbursement account,” and is often referred to as a POP.
Because employees are paying pre-tax for benefits, the money spent for these benefits does not show up as income on their W-2s. Although it has nothing to do with food, a cafeteria plan receives its name from a cafeteria. Before payroll taxes are calculated, employees can select the benefits of their choosing. This is from a pool of possibilities supplied by their employers, just like people make meal choices in cafeterias. Successfully aiding the client in offering a useful, compliant Sec. 125 plan will be a win for the client — especially for its employees.
The key advantage of using a cafeteria plan is that the amount of salary reduction used to pay for qualifying benefits is excluded from the employee’s taxable income for federal tax purposes. Additionally, some employers use a cafeteria plan to offer more expansive benefits, including such things as health and dependent care spending accounts. Cafeteria plans are so commonplace that the origins of this treatment and the attendant requirements are often ignored, particularly among small businesses. Sec. 125 was passed in 1978 to allow employers to offer cafeteria plans in which certain qualified benefits are not taxable. Employees can pay for benefits with pretax wages, saving the employees both income and payroll taxes and encouraging participation among lower-paid employees. (See the sidebar “Reasons Clients Should Have a Sec. 125 Plan.”) The section also requires employers to pass discrimination tests to discourage favoring highly compensated or key employees.
It can help businesses save money while meeting diverse employee needs. Contact a qualified third-party benefits administrator or benefits counsel for assistance with plan creation and compliance issues. Allows for pre tax (salary reduction) and reimbursement of qualified dependent care expenses. When an expense not covered by your health insurance comes up, you can use your cafeteria plan funds to pay for your expenses.
Cafeteria Plan
FSAs enable pre-tax paycheck deductions for eligible healthcare and dependent care expenses. Key features include a fixed plan year for spending, potential grace periods extending the use of funds, and the option for carryover of unused funds. Generally, employees can contribute to an HSA as long as they have an HDHP and meet the other eligibility requirements. However, additional healthcare coverage like non-HDHP plans, Medicare, or access to TRICARE or VA health care may disqualify individuals from being able to make pre-tax HSA contributions. By utilizing a Section 125 plan, employees can contribute to their HSAs with pre-tax dollars, reducing their taxable income and potentially saving on payroll taxes for both the employer and employee.
PREMIUM-ONLY PLANS
Section 125 cafeteria plan is an IRS-approved arrangement that allows employees to pay for certain benefits on a pre-tax basis. It can be used to offer HSAs alongside other eligible benefits, such as health insurance premiums. When employees contribute to a cafeteria plan, their contributions are exempt from federal income tax, Social Security tax, and Medicare tax. This means that the employer does not have to pay payroll taxes on the amount of money contributed to the cafeteria plan.
Supplemental health insurance: What is it & how does it work?
If a change in status does occur, the election changes should be consistent with that event. For example, if an employee divorces, the employee may drop coverage for the spouse but not for themselves or other covered dependents. We do not manage client funds or hold custody of assets, we help users connect with relevant financial advisors.
Medical expenses eligible for reimbursement under a Section 125 cafeteria plan
Forfeiting the $100 means that you still have a net benefit of $140. Can be grouped with high deductible insurance packages, covering percentages or portions of deductibles, or designed for co-pays or full section 213 expenses (similar to FSA plans) and is 100% funded by Employer. Your employer should provide you with documents that detail the plan benefits and any rules or eligibility requirements you need to know about.
The Small Business Owner’s Guide to Starting a Section 125 Cafeteria Plan
Here’s a step-by-step guide to help you get started offering a Section 125 cafeteria plan. Participants who often incur costs for child care and medical concerns benefit most from cafeteria programs. As workforce diversity increases and workers look for more individualized benefits that are catered to their legal requirements, these plans become increasingly beneficial. Some small business clients may not be aware that they can offer a Sec. 125 plan.
Other options may include 401(k) plan contributions for retirement, dependent care assistance, adoption assistance plans, and contributions to Health Savings Accounts (HSAs). A Section 125 premium-only plan (POP) is a https://adprun.net/ that allows employees to pay their health insurance premiums with tax-free dollars. As the name implies, these premiums are the only expense that the funds can cover. The premiums can be for employer-sponsored insurance plans or individual health policies. A cafeteria plan gets its name from a cafeteria but has nothing to do with food.
This means you pay less each paycheck in federal income and FICA (Social Security and Medicare) taxes. Some states also allow participants a reduction in their state income taxes. Section 125 of the IRC prohibits employers from favoring highly compensated individuals and key employees when it comes to eligibility, benefits and utilization under the plan.