What is a Cafeteria Plan?
A Cafeteria Plan is a reimbursement plan governed by IRS Section 125 which allows employees to contribute a certain amount of their gross income to a designated account or accounts before taxes are calculated. These accounts can be for insurance premiums, medical expenses and dependent daycare expenses, from which employees can be reimbursed throughout the plan year or claim period as they incur the expenses. A Cafeteria Plan allows the employer to reduce employees’ gross income, thereby reducing the amount the company pays in Federal Insurance Contributions Act (FICA or Social Security), Federal Unemployment Tax Act (FUTA), Workers’ Compensation, and some state taxes.
There are several different types of pre-tax benefits that can be utilized under the Section 125 Cafeteria Plan:
- Premium Only Plan (POP)
- Flexible Spending Accounts (FSAs)
What is Premium Only Plan (POP)?
Premium Only Plan (POP) is the process of taking after-tax employee contributions to their (employer-provided) group insurance and “converting” them to pre-tax contributions. This results in a tax savings for the employee (Federal, FICA, and sometimes state) as well as the employer (FICA and sometimes Workers’ Compensation). This is simply a bookkeeping transaction; no claim process is required as long as the proper documents have been executed to establish this benefit.
What is a Flexible Spending Account (FSA)?
An FSA is an account into which pre-tax earnings for medical and/or dependent daycare expenses are deposited. It functions like a checking account in that the cafeteria plan administrator (my Cafeteria Plan) actually issues reimbursements to participants for the medical and dependent daycare expenses that they submit.
Features and benefits:-
Employees of employers with cafeteria plans may obtain such benefits as health insurance, group-term life insurance, voluntary “supplemental” insurance (dental, vision, cancer, hospital confinement, accident, etc.) Though some cafeteria plans offer an explicit choice of cash or benefits, most today are operated through a “salary redirection agreement”, which is a payroll deduction in all but name. Deductions under such agreements are often called pre-tax deductions. Salary redirection contributions are not actually or constructively received by the participant. Therefore, those contributions are not generally considered wages for federal income tax purposes.
Reasons for implementing a Section 125 plan are primarily for the tax savings advantages for the employer and employee. Both parties save on taxes and therefore increase their spendable income. Employees’ pretax contributions are not subject to federal, state, or social security taxes. Employers save on the employer portion of FICA, FUTA, and workers’ compensation insurance premiums.
A cafeteria plan may permit an employee to revoke an election during a period of coverage and to make a new election only in limited circumstances, such as a change in status event. A change in status event includes changes in the number of an employee’s dependents.
acheive the goal 