Cafeteria Plans as Employment Benefits
Cafeteria plans are tax-advantaged accounts that 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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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 and coinsurance.
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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.
Healthcare reform and cafeteria plans
On March 23, 2010, President Barack Obama signed the Patient Protection and Affordable Care Act (PPACA) into law, and on March 30, 2010, he signed the Health Care and Education Affordability Reconciliation Act of 2010 (HCEARA), which contained amendments to the PPACA, into law. The two laws make up an expansive healthcare reform package that will have many far-reaching effects on employers.
Among other things, the new package contains provisions affecting:
- annual contributions to health FSAs under cafeteria plans; and
- distributions for qualified medicine under health savings accounts (HSAs), Archer medical savings accounts (MSAs), FSAs, and health reimbursement arrangements (HRAs).
The healthcare reform package also provides for a new safe harbor from the nondiscrimination rules for cafeteria plans (and certain plans offered through cafeteria plans) for plans that are maintained by eligible employers and that meet certain requirements.