Cafeteria Plans

What is a “Cafeteria Plan”?

A Cafeteria Plan is a benefit plan established by an employer, which allows each employee to choose from a menu of qualified benefits with the employee’s cost being paid on a pre-tax basis. Examples of qualified insurance benefits are medical coverage, cancer care, $50,000 group term life, accidental coverage, vision coverage, dental insurance, as well as other qualified supplemental insurance programs. Cafeteria plans can also include “out of pocket” medical spending accounts and qualified dependent care spending accounts. These benefits allow the employee to pull tax free dollars out of their pay checks to cover expenses not reimbursed by the insurance plans and dependent assistant costs.

Who saves tax dollars?

Under a pre-tax deduction the employee will save the federal, state (where applicable), and FICA taxes, and the employer will save the 7.65% FICA matching. It is important to note the Cafeteria Plan is a true tax exemption. The employee and the employer will not have to match or make up any taxes on these deductions at the end of the year.

What guidelines do we have to follow?

Under the guidelines of Section 125 of the Internal Revenue Code, it is important to realize all elections under the Cafeteria Plan will stand for the annual duration of the plan year unless the employee has a qualified change in family status. These qualified changes are as follows: marriage, divorce, death of a spouse or child, birth or adoption of a child, termination or commencement of employment, taking an unpaid leave of absence, and such other events recognized by the IRS. Guidelines for eligibility are identified and written in a company’s plan documents.

Premium Only Conversion

This plan allows for employers to decrease their matching FICA tax and for the employees to increase their take home pay by pre-taxing their portion of insurance premiums. A premium only plan requires the employer to have in place a plan document, corporate resolution and summary plan description. The plan will also have to be tested for discrimination annually, and if the plan has more than 100 participants, a 5500 form must be sent to the IRS within seven months of the end of the plan year.

Flexible Spending Accounts

There are two types of FSAs (Flexible Spending Accounts) available: health care flexible spending accounts and dependent care flexible spending accounts. As an employer, you have the choice of implementing both plans or selecting one over the other.

Healthcare Spending Accounts

A health care FSA is designed to offset employees’ out-of-pocket medical expenses. Through the medical spending account, employees will be able to claim their medical expenses before taxes. Each year the employee will elect a specified amount for that plan year’s deduction. It is important to note that the employees can count their dependents out-of-pocket spending even if the dependent(s) is not on the employer sponsored health insurance.

If an employee chooses this option, they cannot claim medical expense deduction on their tax return.

Qualifying Medical Care Expenses

Following is a list of various medical expenses you may incur regularly that are not reimbursed by a medical or dental plan. You need only decide how much you will spend out of your pocket during the plan year for these items. The total medical reimbursement amounts are set by employers and can be changed before the plan year begins. Employees may submit claims within a certain period of time after the plan year-ends, but only for expenses that are incurred during the plan year. Normally, employers allow employees up to 90 days to submit their claims.

• Medical and dental insurance deductibles.
• Eligible over-the-counter drugs (example: allergy and cold medications, asprin, and pain reliever).
• Ambulance service and other travel costs to get medical care. If you used your own car, you can claim what you spent for gas to go to and from the place you received the care; or you can claim ($.09) per mile. You are also allowed to add parking and tolls to the amount you claim.
• Medical aids such as hearing aids (and batteries), false teeth, eye glasses, contact lenses, braces, orthopedic shoes, crutches, wheel chairs, guide dogs and the cost of maintaining them.
• Medical treatment at a center for drug addiction or alcoholism.
• Hospital care (including meals and lodging), clinic costs and lab fees.
• Nursing services provided in the home.
• Medical examination, x-ray and laboratory service, insulin treatment and whirlpool baths (for the treatment of specific diseases) prescribed by your doctor.
• Medical doctors, dentists, eye doctors, chiropractors, osteopaths, podiatrists, psychiatrists, psychologists, physical therapists, acupuncturists, and psychoanalysts (medical care only).
• Certain prescription drugs and birth control pills prescribed by your doctor for the treatment of a specific medial condition (drugs for weight loss or smoking cessation are not acceptable).

Dependent Care Spending Account

With dependent care spending accounts you can be reimbursed with tax-free dollars for the same types of dependent care expenses that you could claim as a credit on your federal tax return. Even though you may already qualify for the federal and state income tax credit for child care, you will receive a greater benefit with the dependent care reimbursement plan if you’re married and your family’s adjusted gross income is more than $26,000 (Single amount is $18,000).

Qualifying Dependent Care Expenses

• Care provided in your home, someone else’s home, or a dependent care center as long as the caregiver is not your dependent.
• Care for a qualified dependent. Qualified dependents are those you claim as exemptions on your income taxes, including the following:
  • A disabled spouse
  • A person of any age who is unable (mentally or physically) to take care of him or herself and who spends at least eight hours a day in your home
  • Children under age 13
• Care necessary for you (and your spouse, if you are married) to work.
• Your spouse is a full-time student.

There are certain types of dependent care expenses that, unfortunately, cannot be paid for from your plans pretax account.

• Nursing home or other residential care centers.
• Services provided by one of your dependents or children under age 19.
• Costs already taken as a dependent tax credit.

Use-It-or-Lose-It Rule

Both health and dependent care spending accounts are subject to the IRS “use-it-or-lose-it” rule. If employees do not spend their full amounts during their current plan year, the remaining funds in these accounts may revert back to the employer. These forfeited funds can be used by the employer for administrative costs associated with the cafeteria plan or distributed back to the employees who participated in the spending accounts.