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A cafeteria plan is a type of
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plan offered in the United States pursuant to Section 125 of the
Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large The ''United States Sta ...

Internal Revenue Code
. Its name comes from the earliest such plans that allowed employees to choose between different types of benefits, similar to the ability of a customer to choose among available items in a
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cafeteria
. Qualified cafeteria plans are excluded from
gross income For households and individuals, gross income is the sum of all wages A wage is the distribution from an employer Employment is the relationship between two party (law), parties, usually based on a employment contract, contract where wo ...
. To qualify, a cafeteria plan must allow employees to choose from two or more benefits consisting of cash or qualified benefit plans. The Internal Revenue Code explicitly excludes
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plans from qualifying as a cafeteria plan subject to a gross income exemption. Section 125 also provides two exceptions. If the cafeteria plan discriminates in favor of highly compensated employees, the highly compensated employees will be required to report their cafeteria plan benefits as income. The second exception is that if "the statutory nontaxable benefits provided to key employees exceed 25 percent of the aggregate of such benefits provided for all employees under the plan," then the key employees must report their cafeteria plan benefits as income. Effective January 1, 2011, eligible employers meeting contribution requirements and eligibility and participation requirements can establish a "simple" cafeteria plan. Simple cafeteria plans are treated as meeting the nondiscrimination requirements of a cafeteria plan and certain benefits under a cafeteria plan.


History

The Cafeteria Benefits Plan resulted from Thomas Ellsworth Wood of Hewitt Associates and chairman of the Corporate Board for the International Foundation of Employee Benefit Plans. Wood, who once said "one universal benefit program can no longer do the job," was the originator of flexible compensation due to the fact American corporations and households were becoming increasingly dynamic and globalized. As quoted in his chapter of the business publication, ''Business, Work, and Benefits: Adjusting to Change'' produced by the Employee Benefit Research Institute, "Wood's framework creates a specific detailed picture. The concepts include the establishment of a basic "safety net" of benefits to cover financial hazards associated with old age, death and disability, and catastrophic medical expenses, with supplementary benefits offered on a defined contribution basis". Cafeteria plans were added to the Internal Revenue Code in November 1978. Internal Revenue Code Section 125 sets forth the requirements and tax treatment of cafeteria plans. Section 125 has been amended multiple times since its enactment. In May 2005, the Treasury Department and the Internal Revenue Service announced that, effective immediately, employers would be permitted to design cafeteria plans that enable participants to be reimbursed for claims incurred up to 2½ months after the close of a plan year. Before this notice, reimbursements were permitted only for claims incurred during the plan year. Under the new ruling, an employee who participates in a Flexible Spending Account plan ending December 31 can still receive reimbursement for claims incurred through March 15 if the extended grace period is adopted by the employer. Since the "use it or lose it" fear of many employees was reduced significantly by the expanded claims reimbursement cycle, and access to funds can now be better targeted for purchases that the employee actually needs, there has been a clear increase in both the percentage of employees opting to participate in a Flex Plan and in the level of annual elections, enhancing FICA savings for employees and employers alike.


Features and benefits

Employees of employers with cafeteria plans may obtain such benefits as health insurance, group-term life insurance, voluntary "supplemental" insurance (dental, vision, cancer, hospital confinement, accident, etc.), and
flexible spending account In the United States, a flexible spending account (FSA), also known as a flexible spending arrangement, is one of a number of tax-advantaged financial accounts, resulting in payroll tax savings. One significant disadvantage to using an FSA is th ...
s through the plan. Though some cafeteria plans offer an explicit choice of cash or benefits, most today are operated through a "salary redirection agreement", which is a payroll deduction in all but name. Deductions under such agreements are often called pre-tax deductions. Salary redirection contributions are not actually or constructively received by the participant. Therefore, those contributions are not generally considered wages for federal income tax purposes, nor are they usually subject to
Federal Insurance Contributions Act tax The Federal Insurance Contributions Act (FICA ) is a United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in N ...
(FICA) and
Federal Unemployment Tax Act The Federal Unemployment Tax Act (or FUTA, ) is a United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North ...
(FUTA). Reasons for implementing a Section 125 plan are primarily for the tax savings advantages for the employer and employee. Both parties save on taxes and therefore increase their spendable income. Employees' pretax contributions are not subject to federal, state, or social security taxes. Employers save on the employer portion of FICA, FUTA, and workers' compensation insurance premiums. A cafeteria plan may permit an employee to revoke an election during a period of coverage and to make a new election only in limited circumstances, such as a change in status event. A change in status event includes changes in the number of an employee's dependents.


Medical expenses eligible for reimbursement under a Section 125 cafeteria plan

The following is a list of common non-prescription over-the-counter items eligible for reimbursement, dual purpose items that may be reimbursable with a physician's statement and items that are not reimbursable. This list is not all-inclusive.


Over-the-counter expenses eligible for reimbursement under a Section 125 cafeteria plan


Eligible expenses

The following is a list of over-the-counter items the IRS has determined to be primarily for medical care and eligible for reimbursement. Over-the-counter medicines are allowable only with a written recommendation from a physician.


Dual-purpose items

The following list of dual-purpose over-the-counter items can be reimbursed if used for medical purposes. They must be accompanied by a medical practitioner's note stating the item is to treat a specific medical condition and not a cosmetic procedure.


See also


References

{{DEFAULTSORT:Cafeteria Plan Employee benefits Taxation in the United States Fiscal policy