Flexible Spending Accounts
| Section 125 OR Cafeteria Plans
Cafeteria Plans – also known as Flexible Benefit Plans or Section 125 Plans – allow employees to pay for certain benefits with pretax dollars. This allows them to save taxes on insurance premiums, out of pocket health care and/or related child or dependent care expenses. Any dollars the employee defers into the flex plan is withheld before any taxes are calculated. The employer will save their portion of Social Security tax, Medicare, payroll and any other state-required taxes. Federal, State and Social Security taxes are saved on every dollar contributed to the plan.
Cafeteria Plan F.A.Q.
Q. What is a Section 125 Plan? A. Section 125 is a provision of the Internal Revenue Code that allows employees to pay their share of the cost of certain group insurance benefits, non-reimbursed medical expenses, and dependent care expenses with pre-tax dollars. Under this provision, your paycheck is reduced by the amount you elect for the year. That money is removed from your salary structure before Federal Income, State Income, and Social Security taxes are calculated, and placed in a separate account. This results in lower taxable income, and higher take-home pay.
Q. What pre-tax accounts are available to me? A. There are 4 accounts:
Q. How does a Premium Payment Account work? A. A Premium Payment Account allows you to have your contributions toward certain group insurance benefits deducted automatically from your paycheck, before taxes are calculated.
Q. What is the difference between a Flexible Spending Account (FSA) and a Health Savings Account (HSA)? A. A Flexible Spending Account (FSA) is a tax-advantaged financial account set up through the cafeteria plan of an employer. An FSA allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses but often for dependent care or other expenses. Money deducted from an employee’s pay into an FSA is not subject to payroll taxes, resulting in a substantial payroll tax savings. A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a High Deductible Health Plan (HDHP). The funds contributed to the account are not subject to income tax, but can only be used to pay for qualified medical expenses. For more information on Health Savings Accounts please visit www.hsaplanfinder.com.
Q. What is a Medical Reimbursement Account? A. Under this provision, you elect an annual amount to be taken out of your paycheck, pre-tax. These funds are available to reimburse you for out-of-pocket medical, dental, and vision expenses, such as deductibles and co-payments.
Q. What is a Dependent Care Reimbursement Account? A. The Dependent Care Reimbursement Account allows you to pay for your childcare or disabled adult care expenses while you are working, with tax-free dollars.
Q. What is a Personal Policy Account? A. The Personal policy Account allows you to pay for individually owned health insurance plans with pre-tax dollars such as your Blue Cross Blue Shield or Kaiser plans. Unfortunately, group insurance premiums from another employer do not qualify.
Q. How do I enroll in the Section 125 Plan? A. After you’ve reviewed the plan and have had your questions answered, you must complete the enrollment form provided by your employer. Everyone must sign the enrollment form, even if you are declining participation. To elect to participate in the Premium Payment Account, just check the appropriate box. If you are enrolling in the Medical Reimbursement, Dependent Care, or Personal Policy Accounts, you must elect the annual amount to be withheld from your paycheck, taken in equal increments per pay period.
Q. What is the plan year? A. Your plan year is specified in the Plan Information Summary. It does not have to be the same as the calendar year, and, if this is the first year of the plan, it may be shorter than 12 months. Remember to consider these facts when making your annual elections.
Q. Are there any limits to the amount I can set aside for reimbursement? A. Every plan is different. Your employer sets the limits on your plan.
Q. Can I make changes in my elections or drop out before the end of the plan year? A. The only time tax law regulations will allow you to make a change is if there is a change in family status.
Q. Can I switch money between accounts? A. No. The money must be used in each account as specified on the election form.
Q. How do I enroll and use the Medical Reimbursement Account? A. Determine how much you expect to pay this year for medical expenses that are not covered by your Insurance plan. These expenses could be insurance co-payments, deductibles, prescriptions, eyeglasses and exams, chiropractic treatments, dental work, orthodontics, lab fees and special education for learning disabled child. Fill in that amount on the form to be taken out of your paycheck over the year.
Q. What if I don’t incur enough expenses within the year to get back the money deposited in my reimbursement account? A. Unfortunately any dollar not used for expenses are forfeited. This is known as the “use it or lose it” provision of Section 125. It is very important to be conservative and accurate in estimating your expenses for the plan year.
Q. How do I enroll and use the Dependent Care Reimbursement Account? A. Fill in the amount on the enrollment form that you want to have deducted from your salary for the Dependent Care expenses for the year. That amount will be divided equally for each pay period and deducted from your pay. You must then submit a receipt for those expenses from the provider of the Dependent Care to the administrators, along with a voucher. You must include the name and tax identification number of provider, the dates of service and the amount paid for the services. The expenses will be reimbursed up to the amount that you have accumulated in your account at that time. The balance of expenses will be carried over to future months and additional payments will automatically be disbursed as funds are available.
Q. Who is considered an eligible dependent? A. Your dependent(s) under the age of 13, or any dependent that is physically not able to care for himself, is considered to be a qualified dependent.
Q. Can I use the Dependent Care Account if I pay the family member for childcare? A. Yes, but they must be reporting that income on their tax return. If that family member is your own child under the age of 19, you may not claim those expenses.
Q. Are there any other requirements for using the Dependent Care Reimbursement Account? A. Yes, your spouse must be working, be a full time student or unable to care for him or herself.
Q. Can I take tax credit for reimbursed dependent care for medical expenses on my income tax return if I am in this plan? A. No. Expenses reimbursed under this plan may not be used when calculating your medical expense deductions or the Dependent Care tax credit. Because for a few individuals it is sometimes more advantageous to take the dependent care reimbursement account, you should discuss which alternative is the best for you with your tax advisor or the enrollment counselor.
Q. Do I have to file any forms with the IRS? A. Yes, you must file form 2441, Child and Dependent Care Expense, when you file your 1040 with the IRS.
Q. How do I use the Personal Policy Account? A. This account is used to pay for your individual owned insurance plan. To participate in this plan, fill in the amount you will be electing on the enrollment form and submit a copy of the title page of your plan, indicating the name of the insured, the policy number, and the premium amount. When you receive your insurance bill, send or fax a copy of the bill with your voucher and we will send you a reimbursement check.
Q. What happens if I leave the company? A. If you leave the company, your deductions automatically stop. You will be allowed to submit claims for expenses incurred while you were participating in the plan. You may submit claims up to the end of the grace period specified in your plan, usually three months after the end of the plan year. If you want to continue participating in the Medical Reimbursement Account, you can convert your plan to COBRA and continue making your contributions voluntarily after tax, until the end of the plan year. By converting to COBRA, you can submit claims for expenses incurred after your termination.
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