The Cafeteria Plan

1/28/2012

Table of Contents

Abstract 2

Introduction 3

According to the IRS 3

New Cafeteria Plan Regulations 4

Advantages for Employees 5

Disadvantages for Employees 6

Advantages for Employers 7

Disadvantages for Employers 7

Conclusion 8

Reference Page 9

Abstract

Have you ever thought about adding a cafeteria plan or a flex spending account to our company? Do you know what the Advantages and Disadvantages are? In these next few pages I am going to describe some of the more important points of these plans in order to help with the decisions of adding these plans or not. One of the main sources that I used to determine these facts is www.irs.com. One of the easiest articles to follow was http://www.adminamerica.com/new_cafeteria_plan_regulations.htm . They used everyday terms to describe some the changes that took place. The other two articles I found interesting and easy to follow were http://www.hrworld.com/features/cafeteria-health-insurance-plans-052808/) and Pros & Cons of a Section 125 Cafeteria Plan | eHow.com http://www.ehow.com/info_7736034_pros-section-125-cafeteria-plan.html#ixzz1khNtC3Qu. If you choose to read these articles, they will describe a few other bigger issue of starting these plans .

Introduction

A Cafeteria Plan allows employees to pay for their, their spouse's, and their dependent's medical expenses, premiums, and child care before taxes come out of their wages. The employees save money by not having to pay FICA and State Taxes. Employers save money by not having to pay as much in matching payroll taxes because the employee didn't pay taxes on that money. The Flex Spending Account "is a form of cafeteria plan benefit, funded by salary reduction that reimburses employees for expenses incurred for certain qualified benefits. An FSA may be offered for dependent care assistance, adoption assistance, and medical care reimbursements. The benefits are subject to an annual maximum and are subject to an annual "use-or-lose" rule. An FSA cannot provide a cumulative benefit to the employee beyond the plan year." (http://www.irs.gov/govt/fslg/article/0,,id=112720,00.html#1)

Any money you put into the plan is placed into a separate account for each benefit you choose to put money into. The employer opens these account and as you turn in written documentation for a qualifying expense you are reimbursed from the money in your account and the employer issues a separated check to the employee at that time.

According to the IRS;

"A cafeteria plan is a separate written plan maintained by an employer for employees that meets the specific requirements of and regulations of section 125 of the Internal Revenue Code. It provides participants an opportunity to receive certain benefits on a pretax basis. Participants in a cafeteria plan must be permitted to choose among at least one taxable benefit (such as cash) and one qualified benefit.

A qualified benefit is a benefit that does not defer compensation and is excludable from an employee's gross income under a specific provision of the Code, without being subject to the principles of constructive receipt. Qualified benefits include:

Accident and health benefits (but not Archer medical savings accounts or long-term care insurance);

* Adoption assistance;

* Dependent care assistance;

* Group-term life insurance coverage;

* Health savings accounts, including distributions to pay long-term care services.

The written plan must specifically describe all benefits and establish rules for eligibility and elections.

A section 125 plan is the only means by which an employer can offer employees a choice between taxable and nontaxable benefits without the choice causing the benefits to become taxable. A plan offering only a choice between taxable benefits is not a section 125 plan." (http://www.irs.gov/govt/fslg/article/0,,id=112720,00.html#1)

New Cafeteria Plan Regulations

"At the beginning of August, the Internal Revenue Service released new Proposed Regulations relating to Cafeteria Plans. These Proposed Regulations have been long anticipated and are very comprehensive. These new Proposed Regulations replace previously Proposed Regulations issued in 1984 and 1989 which were never finalized but nevertheless were widely accepted as governing Cafeteria Plans. Most of the major provisions contained in the 1984 and 1989 Proposed Regulations remain but the new Proposed Regulations also formalize many other issues about which the IRS had provided informal guidance during the intervening years. In addition to expressly stating rules that were only

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