A Cafeteria Plan (includes Premium Only Plans and Flexible Spending Accounts) is an employee benefits program designed to take advantage of Section 125 of the Internal Revenue Code.
A Cafeteria Plan allows employees to pay certain qualified expenses (such as health insurance premiums) on a pre-tax basis, reducing their total taxable income and increasing their spendable and take-home income.
Funds set aside in Flexible Spending Accounts (FSAs) are not subject to federal, state, or Social Security taxes. On average, employees save from $.25 to $.49 for EVERY dollar they contribute to the FSA.
Premium Only Plan (POP)
Employers may deduct the employee’s portion of the company-sponsored insurance premium directly from there employee’s paycheck before taxes are deducted.
Flexible Spending Account (FSA)
In an FSA, employees may set aside on a pre-tax basis a pre-established amount of money per plan year. The employee can use the funds in the FSA to pay for eligible medical, dental, vision expenses, dependent care, and some transportation expenses.
- Benefits to the Employer
- Employers can include an FSA Plan to enhance their overall benefit package. Because an FSA Plan offers a tax-advantage, employers experience tax savings from reduced FICA, FUTA, SUTA, and Workers’ Compensation taxes on participating employees. These tax savings reduce costs or eliminate costs that are associated with offering the plan. Increased participation equals greater tax savings to the employer.
- An employee who participates in the FSA places a certain dollar amount into the FSA each year. This “election” amount is automatically deducted from the employee’s check (for that amount divided by the number of payroll periods).
Plan Year and Grace Period
The plan year is one full year (365 days) and generally begins on the first of a month. Many employers design their flexible spending plan to run on the same plan year as their insurance program. Short plan years are allowed in certain instances.
The grace period has a timeframe up to 75 days after the end of the official plan year in which employees may use up any funds remaining at the end of the plan year.
In addition to the 75 day grace period, plan participants have an additional 90-day run-out period in which they can submit requests for reimbursement for expenses incurred during the dates of service within the plan year and grace period.