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Glossary of Terms: Section 125 Plans

Cafeteria Plan: IRS Code Section 125.

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A group benefit plan established by an employer for the employees. Cafeteria Plans are authorized under the U.S. Internal Revenue Code, Section 125. Also referred to as a Section 125 Plan (POP) and a Flexible Benefits Plan (FSA).

Medical Expense Reimbursement Flexible Spending Accounts (FSA):
A non-insurance plan established for employees that allows them to set aside certain funds, tax free, to be used to reimburse the employee for expenses authorized under the plan. Medical Reimbursement FSA accounts can be established to reimburse employees for out-of-pocket expenses not covered under the group health and medical plan such as annual deductibles, employee’s co-insurance share, prescriptions, and the like. They are also called unreimbursed medical accounts and flexible spending accounts

Issues employers need to consider include determining the annual limit on benefits available to employees. The full annual benefit is avialable to employees on the first day of the plan year even though employees may not have made any contributions.

Adult/Child Dependent Carel Reimbursement Flexible Spending Accounts (FSA):
Dependent Care FSA accounts can be established to reimburse employees for out-of-pocket expenses relating to adult/child dependent care.

These accounts may be funded by employee elections through salary reduction or they may be employer funded.

Employees may participate in reimbursements, without regard to participation in other medical plans.

Medical/Dental FSA Reimbursement Account: IRS Code Section 105.
Expenses not covered by the employer plan may qualify as eligible expenses reimbursable under Accident and Health coverage. If the plan is not totally funded or paid by the employer’s medical plan, employees may make annual elections and have these deductions placed in his/her Medical/Dental Reimbursement Account.

Annual elections are most generally payroll deducted from the employee’s paycheck on a per pay period basis, and deposited in the employee’s Reimbursement Account. These payroll deduction amounts are made on a Pre-Tax basis.

When an eligible expense is incurred, the employee submits these expenses (much like filing an insurance claim form) and completes an expense voucher from which they are reimbursed on a Pre-Tax basis.

Dependent Care Assistance: IRS Code Section 129.
Dependent Care Assistance for employees is covered under Code Section 129, and may be provided through use of reimbursement accounts, flexible spending accounts or actual on site facilities.

Elections and benefits are limited to $2,500 or $5,000 annually depending on whether the employee’s tax filing status is joint or separate.

Elections are payroll deducted on a Pre-Tax basis and placed in the employee’s Dependent Care Assistance Account. As dependent care expenses are incurred, the employee submits the expense with a completed claim voucher and is reimbursed from his/her account on a Pre-Tax basis.

It is important to note that Dependent Care Reimbursement expenses do not have to be just for child(ren). These expenses may also cover expenses for elder care.

Accident & Health Plans: Excluded for gross income via Code Sections 105 and 106.
Premium costs for these programs are eligible under Section 125. These programs would include employer sponsored Personal Accident plans, Accidental Death & Dismemberment plans, Disability plans and Cancer/Intensive Care plans, etc.

Only plans that have no cash accumulations or return of premium features (even as optional riders) are eligible for inclusion.

Term Life Insurance: IRS Code Section 79.
The expense of the first $50,000 is excluded from gross income under Code Section 79. Amounts above $50,000 may be included on the employee’s menu of benefits, but are not payable on a Pre-Tax basis.

In addition, amounts other than “de minimus” amounts are not deductible for the employee spouse and or children.

Download the Core Documents Section 125 Cafeteria Plan Employer Guide HERE