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AcafeteriaplanisatypeofemployeebenefitplanofferedintheUnitedStatespursuanttoSection125ofthe
InternalRevenueCode.[1]Itsnamecomesfromtheearliestsuchplansthatallowedemployeestochoosebetween
differenttypesofbenefits,similartotheabilityofacustomertochooseamongavailableitemsinacafeteria.
Qualifiedcafeteriaplansareexcludedfromgrossincome.[2]Toqualify,acafeteriaplanmustallowemployeesto
choosefromtwoormorebenefitsconsistingofcashorqualifiedbenefitplans.[3]TheInternalRevenueCode
explicitlyexcludesdeferredcompensationplansfromqualifyingasacafeteriaplansubjecttoagrossincome
exemption.[4]Section125alsoprovidestwoexceptions.[5]
Ifthecafeteriaplandiscriminatesinfavorofhighlycompensatedemployees,thehighlycompensatedemployees
willberequiredtoreporttheircafeteriaplanbenefitsasincome.[6]Thesecondexceptionisthatif"thestatutory
nontaxablebenefitsprovidedtokeyemployeesexceed25percentoftheaggregateofsuchbenefitsprovidedforall
employeesundertheplan,"thenthekeyemployeesmustreporttheircafeteriaplanbenefitsasincome.[7]Effective
January1,2011,eligibleemployersmeetingcontributionrequirementsandeligibilityandparticipation
requirementscanestablisha"simple"cafeteriaplan.Simplecafeteriaplansaretreatedasmeetingthe
nondiscriminationrequirementsofacafeteriaplanandcertainbenefitsunderacafeteriaplan.[8]
Contents
1 History
2 Featuresandbenefits
2.1 MedicalexpenseseligibleforreimbursementunderaSection125cafeteriaplan
2.2 OverthecounterexpenseseligibleforreimbursementunderaSection125cafeteriaplan
2.2.1 Eligibleexpenses
2.2.2 Dualpurposeitems
3 Seealso
4 References
History
TheCafeteriaBenefitsPlanwasaresultoftherevelationthat"oneuniversalbenefitprogramcannolongerdothe
job,"saidThomasE.WoodofHewittAssociatesandchairmanoftheCorporateBoardfortheInternational
FoundationofEmployeeBenefitPlans.Woodwastheoriginatorofflexiblecompensationduetothefact
Americancorporationsandhouseholdswerebecomingincreasinglydynamicandglobalized.Asquotedinhis
chapterofthebusinesspublication,Business,Work,andBenefits:AdjustingtoChangeproducedbytheEmployee
BenefitResearchInstitute,"Wood'sframeworkcreatesaspecificdetailedpicture.Theconceptsincludethe
establishmentofabasic"safetynet"ofbenefitstocoverfinancialhazardsassociatedwitholdage,deathand
disability,andcatastrophicmedicalexpenses,withsupplementarybenefitsofferedonadefinedcontributionbasis".
[9]
CafeteriaplanswereaddedtotheInternalRevenueCodeinNovember1978.[10][11]InternalRevenueCodeSection
125setsforththerequirementsandtaxtreatmentofcafeteriaplans.[12]Section125hasbeenamendedmultiple
timessinceitsenactment.[13]
InMay2005,theTreasuryDepartmentandtheInternalRevenueServiceannouncedthat,effectiveimmediately,
employerswouldbepermittedtodesigncafeteriaplansthatenableparticipantstobereimbursedforclaims
incurredupto2monthsafterthecloseofaplanyear.Beforethisnotice,reimbursementswerepermittedonlyfor
claimsincurredduringtheplanyear.Underthenewruling,anemployeewhoparticipatesinaFlexibleSpending
AccountplanendingDecember31canstillreceivereimbursementforclaimsincurredthroughMarch15ifthe
extendedgraceperiodisadoptedbytheemployer.
Sincethe"useitorloseit"fearofmanyemployeeswasreducedsignificantlybytheexpandedclaims
reimbursementcycle,andaccesstofundscannowbebettertargetedforpurchasesthattheemployeeactually
needs,therehasbeenaclearincreaseinboththepercentageofemployeesoptingtoparticipateinaFlexPlanand
inthelevelofannualelections,enhancingFICAsavingsforemployeesandemployersalike.
Featuresandbenefits
Employeesofemployerswithcafeteriaplansmayobtainsuchbenefitsashealthinsurance,grouptermlife
insurance,voluntary"supplemental"insurance(dental,vision,cancer,hospitalconfinement,accident,etc.),and
flexiblespendingaccountsthroughtheplan.Thoughsomecafeteriaplansofferanexplicitchoiceofcashor
benefits,mosttodayareoperatedthrougha"salaryredirectionagreement",whichisapayrolldeductioninallbut
name.Deductionsundersuchagreementsareoftencalledpretaxdeductions.Salaryredirectioncontributionsare
notactuallyorconstructivelyreceivedbytheparticipant.Therefore,thosecontributionsarenotgenerally
consideredwagesforfederalincometaxpurposes,[14]noraretheyusuallysubjecttoFederalInsurance
ContributionsActtax(FICA)[15]andFederalUnemploymentTaxAct(FUTA).[16]
ReasonsforimplementingaSection125planareprimarilyforthetaxsavingsadvantagesfortheemployerand
employee.Bothpartiessaveontaxesandthereforeincreasetheirspendableincome.Employees'pretax
contributionsarenotsubjecttofederal,state,orsocialsecuritytaxes.Employerssaveontheemployerportionof
FICA,FUTA,andworkers'compensationinsurancepremiums.[17]
Acafeteriaplanmaypermitanemployeetorevokeanelectionduringaperiodofcoverageandtomakeanew
electiononlyinlimitedcircumstances,suchasachangeinstatusevent.Achangeinstatuseventincludeschanges
inthenumberofanemployee'sdependents.[18][19]
MedicalexpenseseligibleforreimbursementunderaSection125cafeteriaplan
Thefollowingisalistofcommonnonprescriptionoverthecounteritemseligibleforreimbursement,dual
purposeitemsthatmaybereimbursablewithaphysician'sstatementanditemsthatarenotreimbursable.Thislist
isnotallinclusive.
a.Healthinsuranceprovidedthroughanemployee'sspouse'sgrouphealthplanisallowableonlyifthespousepaidforallor
partofthecoverageonanaftertaxbasis.[20]
b.PursuanttoRevenueRuling2003102,overthecounterdrugsthatareusedtoalleviateortreatpersonalinjuriesor
sicknessarenowreimbursablethroughhealthcareflexiblespendingaccounts.
OverthecounterexpenseseligibleforreimbursementunderaSection125cafeteriaplan
Eligibleexpenses
ThefollowingisalistofoverthecounteritemstheIRShasdeterminedtobeprimarilyformedicalcareand
eligibleforreimbursement.Overthecountermedicinesareallowableonlywithawrittenrecommendationfroma
physician.
Thefollowinglistofdualpurposeoverthecounteritemscanbereimbursedifusedformedicalpurposes.They
mustbeaccompaniedbyamedicalpractitioner'snotestatingtheitemistotreataspecificmedicalconditionand
notacosmeticprocedure.
Acnetreatmentformedicalconditionsuchas Pillsforlactoseintolerance
acnevulgaris Prenatalvitamins
Dietarysupplementsorherbalmedicinestotreat St.John'sWortfordepression
medicalconditionsinspecificcircumstances Sunscreen
Fibersupplementsundernarrowcircumstances Weightlossdrugstotreataspecificdisease
Glucosamine/chondrotinforarthritis includingobesity
Orthopedicshoesandinserts
Hormonetherapyandtreatmentformenopause
symptomssuchashotflashesandnightsweats
Seealso
TaxationintheUnitedStates InternalRevenueService
PayrolltaxesintheUnitedStates Freelancemarketplace
CorporatetaxintheUnitedStates
References
1.26U.S.C.125(http://www.law.cornell.edu/uscode/usc_sec_26_00000125000.html).
2.26U.S.C.125(a)(http://www.law.cornell.edu/uscode/usc_sec_26_00000125000.html).
3.26U.S.C.125(d)(1)(http://www.law.cornell.edu/uscode/usc_sec_26_00000125000.html).
4.26U.S.C.125(d)(2)(http://www.law.cornell.edu/uscode/usc_sec_26_00000125000.html).
5.See26U.S.C.125(b)(http://www.law.cornell.edu/uscode/usc_sec_26_00000125000.html).
6.See26U.S.C.125(b)(1)(http://www.law.cornell.edu/uscode/usc_sec_26_00000125000.html).
7.See26U.S.C.125(b)(2)(http://www.law.cornell.edu/uscode/usc_sec_26_00000125000.html).
8.IRSPublication15B(http://www.irs.gov/publications/p15b/ar02.html).
9.[1](http://www.ebri.org/pdf/publications/books/business_work_and_benefits.pdf).
10.Pub.L.95600,97Stat.2763(Nov.6,1978).
11.Walker,Ruth(December6,1983)."Cafeteriapensionplansbalancethenowagainstlater".TheChristianScience
Monitor.p.B11.
12.26U.S.C.125(http://www.law.cornell.edu/uscode/usc_sec_26_00000125000.html).
13.See26U.S.C.A.125.
14.Publication15B:Employer'sTaxGuidetoFringeBenefits(http://www.irs.gov/pub/irspdf/p15b.pdf).InternalRevenue
Service.2010.
15.InternalRevenueCodeSection3121(a)(2)
16.InternalRevenueCodeSection3306(b)(2)
17."BenefitsofSection125Plans".Section125Plans.Section125Plans.com.Retrieved26September2011.
18.Treas.Reg.1.1254(c).
19."InternalRevenueServiceRegulation1.1254:PermittedElectionChanges.IRC,2002FED7320,Sec.125,Cafeteria
Plans"(pdf).InternalRevenueService.CommerceClearingHouse,Inc.
20.Beker,Harry."Memorandum201547006(http://www.irs.gov/pub/irswd/201547006.pdf)".OfficeofChiefCounsel.
InternalRevenueService.November20,2015.
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