Section 125 Cafeteria Plans refer to an employee benefit that allows you to pay certain expenses with pre-tax dollars. With this benefit, you maximize your income and reduce your tax burden.
What are Section 125 Cafeteria Plans?
These employee benefit plans get their names from Section 125 of the IRS Code. With Section 125 Plans, you deposit pre-tax dollars into a special account and use those funds to pay qualified expenses. The funds in these plans are exempt from federal, state, Social Security, Medicare, FICA and FUTA taxes.
You could save up to 50 cents for every dollar you contribute to a Section 125 Plan account. It’s a beneficial way to reduce your taxable income and increase the disposable income in your paycheck every week.
You may choose from several types of Section 125 Cafeteria Plans, including Premium Only Plans and Flexible Spending Accounts.
- Premium Only Plan (POP) – Your employer deducts your health insurance premiums before deducting taxes from your paycheck.
- Flexible Spending Account (FSA) – You choose an amount of money you’ll contribute to your FSA and then use the funds to pay eligible expenses.
According to the IRS, employers must offer Section 125 plans to all eligible employees. They cannot discriminate based on protected statuses or your job description, pay rate or seniority.
What Expenses do Section 125 Cafeteria Plans Cover?
Depending on your specific Section 125 Cafeteria Plan, you may use it to pay expenses related to:
- Adoption expenses
- Dependent care
- Group term life insurance premiums
- Health savings account premiums
- Medical treatment
- Supplemental insurance such as accident, cancer, dental or vision insurance
- Transportation expenses
How to Enroll in Section 125 Cafeteria Plans
Talk to your Human Resources department for details on enrollment in Section 125 Plans. Many employers hold an open enrollment for benefits during December, but your company’s enrollment date may vary.
How to Take Distributions From Section 125 Cafeteria Plans
Submit requests for reimbursement to your HR department. Usually, you don’t have to wait until the end of the year to withdraw funds for medical expenses from your Section 125 Cafeteria Plan. As soon as you have a qualified expense, you can take money from your account. This uniform coverage rule does not apply to a dependent care FSA.
Remember that you will lose any funds you don’t withdraw since they do not carry over to the next year. Track your contributions on your pay stub or ask your HR manager.
Section 125 Cafeteria Plans help you save for qualified expenses and give you extra cash in your paycheck. They also help you budget for medical and dependent care expenses, so consider opening an account this year.
