Section 125 Cafeteria Plans: Everything to Know in 2024

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The act allows for more flexibility when it comes to carrying over unused balances from plan years 2020 and 2021, as well as extending permissible grace periods for these plan years. Section 125 plans do state that you must use any remaining funds in the account by the end of the year or the money is forfeited to your employer. But a carryover provision that was implemented in 2013 does allow plan participants to extend up to $500 of unused funds from one year to the next.

The cash payment is treated as wages and is liable to all employment taxes if the employee chooses to receive it instead of any eligible perk. FSAs allow employees to contribute part of their pay before taxes to cover eligible health care and dependent care expenses. In 2022, employees can contribute up to $2,850 to a cafeteria plan. Most employee benefit plans are covered by the Employee Retirement Income Security Act (ERISA) and must also furnish a summary plan description (SPD).

  1. When in doubt, always seek legal counsel or assistance from the state, federal, or international government resources to make certain your legal interpretation and decisions are correct.
  2. Cafeteria plans are also referred to as Section 125 plans, after the section of the Internal Revenue Code (IRC) that regulates such arrangements.
  3. Before payroll taxes are calculated, employees can select the benefits of their choosing.
  4. 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.

Many dual-purpose items are eligible, such as dietary supplements, orthopedic shoes, prenatal vitamins, and sunscreen.

cafeteria plans are available to employees, their spouses, and dependents. If your employer has one, you should be eligible to enroll when hired or during your employer’s open enrollment period. Cafeteria plans are also called Section 125 plans or flexible benefits plans. It is essential to conduct non-discrimination testing annually to maintain compliance. A benefits administrator with expertise in Cafeteria plans may aid you in performing these tests accurately and efficiently and ensure that your plan remains compliant.

Can employees contribute to an HSA if they have other healthcare coverage?

The money that is subtracted is pre-tax, meaning employees don’t have to pay tax on it. But in most cases, if they don’t use the money set aside before https://adprun.net/ the end of the year, it is forfeited. Because plans are not standard from employee to employee, they can take a lot of time to maintain and administer.

In addition, if you use the dependent care benefit under the Cafeteria Plan, you can also benefit from tax savings when using pre-tax dollars to pay for eligible dependent care expenses. If you have diverse needs for healthcare and other benefits, a Cafeteria Plan offers increased flexibility in making choices tailored to your situation. As an employer, sponsoring a Cafeteria Plan can provide your employees with valuable benefits while offering tax advantages to both parties.

These benefits can be deducted from an employee’s paycheck before taxes are paid. Cafeteria plans are particularly good for participants who have regular expenses that are related to medical issues and child care. The rules for a flexible spending account (FSA) differ slightly from the “use it or lose it” rules that apply to other cafeteria plan benefits.

Plan Administration and Compliance

An SPD is a plain-English version of the main plan document and the adoption agreement, and it is meant to inform employees about the aspects of the cafeteria plan. The plan documents must be updated and amended at least every five years to reflect any applicable plan changes or regulatory updates. The tax savings for employees through the use of pretax dollars to pay for benefits can be substantial. A cafeteria plan – also known as a Section 125 plan, after the portion of the IRS code that regulates the plans – lets employees redirect part of their salaries and wages to pay for certain benefits. Section 125 plans let employees use pre-tax dollars for these benefits, which include health and life insurance.

Types of Cafeteria Plan

With a full flex plan, employers contribute to a separate account for all eligible employees; the employees then use their contributions to choose from various benefits offered. Any portion of a benefit’s cost that exceeds the employer’s contribution can be paid by the employees pre-tax. By funding the plan with pre-tax dollars, it reduces an employee’s taxable income and thus the amount they lose to taxes. (In this respect, it’s similar to a 401(k) or FSA account.) Money directed into the plan is free from federal income tax, as well as Social Security and Medicare (FICA) taxes. The plan passes the eligibility test if all employees, including part-timers, are eligible for the cafeteria plan. If not, the plan can only pass the test if the ratio of lower compensated employees to highly compensated employees who are eligible for the plan meets the Internal Revenue Service standards.

Cafeteria-style plans provide a special exception to federal income tax rules that apply to an employee’s earnings. In a cafeteria-style plan, employees are allowed to select among various nontaxable benefits and cash. A Section 125 plan is part of the IRS code that enables and allows employees to take taxable benefits, such as a cash salary, and convert them into nontaxable benefits.

Group insurance products included in this plan are health, disability, dental, vision, and term life. Because of this, employees and potential employees are examining the benefits companies are offering with a more critical eye than ever before. While they expect traditional benefits like a 401(k) plan and health, life, and disability insurance to be included, they’re also searching for additional money-saving benefits.

A written plan document is mandatory to establish and maintain a Cafeteria Plan. This document contains essential details such as the plan’s eligibility criteria, benefits offered, enrollment process, and contribution limits. The general rule is that HSA funds cannot be used to pay health insurance premiums, though there are exceptions. For example, taxpayers can use HSA funds to pay health insurance premiums while collecting federal or state unemployment, or to pay COBRA continuation coverage premiums. Under cafeteria programs, employees may select both taxable and nontaxable benefits. Benefits that are not subject to taxation include retirement contributions and insurance alternatives.

Funds allocated but not spent by the employee were forfeited at the end of the year. For instance, John forfeited $500 if he only spent $1,500 of the $2,000 he allocated. Changes were made to allow employees to roll over up to $500 of unused funds from one year into the following year. These are just a few of the HR functions accounting firms must provide to stay competitive in the talent game. Quality business communication among all teams is a key factor for the succ… It all starts with having an honest and open relationship with employees and colleagues.

Especially among small employers, a premium-only plan (POP) may seem the perfect way to strike that balance — except for employees who opt out. Some small businesses don’t realize that plan documents are required. Plan documents can be prepared and updated annually by professionals in benefits administration services. The tax code also stipulates that employers offering a cafeteria plan to their employees must include all employees with 1,000 hours or more of service in a plan year.

That’s because the employer doesn’t have to pay the other half of the FICA tax on salary and wages put in a cafeteria plan. Smaller employers may offer these as a cheaper alternative to company-paid employee health coverage. With a cafeteria plan, employees can get tax-advantaged dollars to pay for their own insurance.

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