Glynn Griffing & Associates offers a wide range of services associated with Section 125 Cafeteria Plans.

What is a Cafeteria Plan?

Cafeteria plans are an IRS program that employers use to allow employees to pay for certain benefits with pre-tax dollars. This includes:

  • Certain Insurance premiums
  • Medical Reimbursement (FSA)
  • Dependent Care Reimbursement

How Cafeteria Plans Benefit Employees

Cafeteria Plans are one of the most popular employer benefits because they allow employees to save federal, state, and social security taxes on the benefits they choose. So, depending on your tax rate, that could add up to as much as 40% in tax savings, giving you more take home pay.

This benefits comparison shows how deducting medical expenses before taxes saves participants money.

Post Tax Method
(Without Cafeteria)

Income                     $1,000.00
Taxes (25%)                  -250.00
Subtotal                         750.00
Medical Expenses      -100.00
Net                               $650.00

Pre-Tax Method
(With Cafeteria)

Income                      $1,000.00
Medical Expenses       -100.00
Subtotal                         900.00
Taxes (25%)                   -225.00
Net                                $675.00

Annual Savings: $300.00

Medical Reimbursement Accounts / Flexible Spending Accounts (FSA)

IRS allows employees to set aside tax free dollars from their paycheck to pay for medical expenses that are not covered by insurance. This is not tied to an employer’s health insurance plan. Participants decide on an annual election, and that sum is divided into the number of annual pay periods and are deducted from their paychecks.

This election cannot be changed midyear unless there is a change of status.

Eligible Medical Expenses

Below are some examples of qualified medical expenses. Many expenses are covered, but medical expenses for cosmetic purposes are not covered. This is not a comprehensive list – please click here for a list of all expenses.

  • Co-pays
  • Deductibles
  • Dental Fees
  • Vision Care
  • Birth Control Pills
  • Chiropractors
  • Prescription Drugs
  • Orthodontia
  • Lasik Eye Surgery
  • Physical Therapy
  • Blood Pressure Monitors
  • Hearing Devices

 

The Use-It-Or-Lose-It-Rule

Contributions to an FSA must be used by the end of the year, as they do not roll over. Participants are urged to be conservative with their contributions and only set aside money that they know will be spent during the year.

Dependent Care

Dependent Care FSAs allow employees to set aside tax-free money to pay for dependent care. Typical Dependent Care providers include child care centers, day care, nursery schools, summer day camps, pre-school care, after-school care, and private sitters who are not the employee’s dependent.

What qualifies as a Dependent Care Expense?

  • Expenses incurred that allow you (and your spouse, if married) to work or look for work.
  • Expenses for the well-being and protection of a qualifying person.
  • Housekeepers, maids, or cooks performing duties while caring for a qualified person (does not included food, clothing, education, or entertainment).
  • Expenses paid to a dependent care center if the center complies with all applicable state and local regulations.

What is NOT covered under Dependent Care Reimbursements

  • Clothing, entertainment, food, overnight camp, or school tuition unless incidental to and not easily separated from total cost (ex. preschool child care services).
  • Expenses incurred while off work due to illness, regardless of whether or not sick pay is received.
  • Payments made to children under the age of 19 at the end of the year.
  • Payments made to a relative if the person is a legal dependent.

By participating in Dependent Care, you reduce your taxable income and increase your take home pay. Typical Dependent Care providers include in home providers/housekeepers, child care provided by a licensed provider or day care centers. Reimbursement requires either a tax identification number or social security number of provider.

The IRS has set these maximum allowable contributions for reimbursement: $5000.00 for a married couple filing jointly; $5000.00 for a single parent; $2500.00 for a married person filing separately. The child must be under 13 years old and must be a dependent under federal tax rules. Examples of typical Dependent Care providers are Child Care Centers and home care/housekeepers.

Note: Unlike medical FSA’s, dependent care FSA’s are not pre-funded; employees cannot receive reimbursement for the full amount of the annual contribution on day one. Employees can only be reimbursed up to the amount they have had deducted during that plan year.

Premium Only Cafeteria Plans

The Premium Only Plan (POP) enables employees to pre-tax eligible insurance premiums such as health insurance, term life insurance, dental insurance, and vision insurance. By participating in this program, employees can reduce their tax liability and increase their take-home pay.

By using a pre-tax salary deduction for these expenses, employees typically save between 15%-40% on premiums.

Pre-Tax Benefits for Participants

  • Participants take home more pay and pay less taxes because Federal taxes, State taxes, and Social Security because taxes are all calculated after Insurance Premium have been deducted.
  • W-2s are reduced by the amount of the election.
  • There is no tax liability on money contributed to Section 125 plans. W-2s reflect the amount after POP deductions are subtracted.

Premiums Eligible Under POP

Premium payments for the following benefits may be eligible under POP when payroll is
deducted through an employer:

  • Major Medical Insurance
  • Supplemental Health Insurance
  • Group Term Life Insurance-Employee only. Maximum of $50,000 of coverage
    premium is eligible.
  • Accidental Death & Dismemberment
  • Cancer Insurance
  • Intensive Care/Dread Disease
  • Dental Insurance
  • Vision Insurance

Are you interested in a Cafeteria plan for your business? Please contact Glynn Griffing & Associates to hear more about how we can offer plans and policies that will benefit your staff.

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