Cafeteria Plans | Flexible Spending Accounts

What is a Cafeteria Plan?

A Cafeteria Plan is a reimbursement plan governed by IRS Section 125 which allows employees to contribute a certain amount of their gross income to a designated account or accounts before taxes are calculated. These accounts can be for insurance premiums, medical expenses and dependent daycare expenses, from which employees can be reimbursed throughout the plan year or claim period as they incur the expenses. A Cafeteria Plan allows the employer to reduce employees’ gross income, thereby reducing the amount the company pays in Federal Insurance Contributions Act (FICA or Social Security), Federal Unemployment Tax Act (FUTA), Workers’ Compensation, and some state taxes.

There are several different types of pre-tax benefits that can be utilized under the Section 125 Cafeteria Plan:

  • Premium Only Plan (POP)
  • Flexible Spending Accounts (FSAs)

What is Premium Only Plan (POP)?

Premium Only Plan (POP) is the process of taking after-tax employee contributions to their (employer-provided) group insurance and “converting” them to pre-tax contributions. This results in a tax savings for the employee (Federal, FICA, and sometimes state) as well as the employer (FICA and sometimes Workers’ Compensation). This is simply a bookkeeping transaction; no claim process is required as long as the proper documents have been executed to establish this benefit.

What is a Flexible Spending Account (FSA)?

An FSA is an account into which pre-tax earnings for medical and/or dependent daycare expenses are deposited. It functions like a checking account in that the cafeteria plan administrator (myCafeteriaPlan) actually issues reimbursements to participants for the medical and dependent daycare expenses that they submit.