Cafeteria Plans

Additional HR Resources IRS Changes What the recent IRS regulations mean for your organization's cafeteria plan Changes in the Future The Supreme Court's recent 401(k) ruling may change future plan offerings A New Generation of Benefits Increasing healthcare costs are changing the face of employee benefits Plan Resources in Your State State-by-state guidance on the latest and greatest cafeteria plan tools Real-Time State Changes Learn the latest developments in plan changes for your state in real-time Federal Guidance Learn the federal rules recently issued for cafeteria plans

These tax-advantaged accounts are called cafeteria accounts because employees can pick and choose from a number of different benefits they can fund with pretax dollars. They’re also called Section 125 Plans (for the section of the federal tax code that applies to them), flexible spending accounts (or FSAs), and health FSAs if they offer a choice of health benefits. Depending on how cafeteria plans are set up, they may be subject to COBRA.

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Cafeteria Plans tools for Employment Law Letter subscribers

Whatever you call them, these accounts help employees stretch their earnings since taxes aren’t taken out of whatever amounts they deduct from their paychecks. Employees may also purchase additional benefits through a pretax payroll reduction, and some plans are set up so that employee premiums for health and other insurance are paid pretax.

Many employers offer FSAs that include medical reimbursement accounts. These allow employees to pay pretax dollars into a fund from which they can later be reimbursed for medical expenses that aren't covered under their regular insurance, such as copays, coinsurance, and over-the-counter medications.

Child-care reimbursement accounts are like FSAs, but are for dependent-care expenses – such as the cost of sending a child to day care or preschool. Such accounts can be established for dependent care services (for elders, children, or both), such as day care or in-home or outside babysitting or elder-companion services. Keep in mind, though, that dependent care and medical reimbursement accounts must be established as separate accounts and cannot be used interchangeably. The amount employees are allowed to set aside in these accounts each year is limited, typically to about $2,000 for medical expenses and $5,000 for dependent-care expenses.

Money earmarked for reimbursement accounts reduces the employee’s taxable income. But employees must carefully calculate the amount they have you set aside. An employee who ends up with money left in the reimbursement account at the end of the year loses the money. But when employees use what they’ve set aside, the tax savings can be substantial, sometimes even offsetting the amount lost to nonuse at the end of the year.

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HR Tools for Cafeteria Plans

• Sample Policy - Health and Welfare Benefits