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 and medical or dependent care expenses not covered by insurance, 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:
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 care expenses are deposited. It functions like a checking account in that the cafeteria plan administrator (myCafeteriaPlan) actually writes checks to participants for the medical and dependent care expenses that they submit.
What is an Individually Owned Insurance Account?
Please note: Individual Insurance can not be reimbursed due to Health Care Reform.
A cafeteria plan may reimburse participants for their premiums for coverage under an accident or health plan so long as the coverage is excludable from income under Code Section 106. Therefore, any accident or health coverage that satisfies Code Section 106 may qualify under the cafeteria plan rules, even if provided by individual policies. However, employers should be cautious about adding this benefit to their cafeteria plan. There could be some unintended consequences if these policies should fail to qualify under the “DOL voluntary safe harbor” provisions. An employer should clearly understand the implications of the plan becoming subject to ERISA, COBRA, HIPAA, FMLA, USERRA, and other laws. Individual policies must not provide benefits that defer compensation.