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Cafeteria Plans

Cafeteria Plan

What is it and what does it mean to you? This page is designed to give you an outline of what it is, how it works, and answer some general questions.

A Cafeteria Plan or Section 125 Plan or Flexible Spending Account, they all mean the same type of plan. Briefly, it is section 125 of the Internal Revenue Code that allows certain expenses to be paid with pre-tax dollars from your paycheck. These expenses are either medical in nature or related to dependent care. This page includes a list of medical related expenses that you can submit for payment (see last section).

So how does it save you money? Let's look at an example:

John Q. Employee knows that he has dental expenses for his children coming up in 2003 and he also needs new glasses that are not covered by insurance. Here is what happens before and after he decides to use an Unreimbursed Medical Account (UMA). The employee's family also has dependent care expenses for their children of $2500 per year and they decide to use a Dependent Care Account (DCA) to help with the day care costs. Having the money taken out of his paycheck pretax is known as redirecting.

Illustration for demonstration purposes only

Annual Salary $25,000 Marital Status: Married
Before Cafeteria Plan After Cafeteria Plan
Annual Salary $25,000 $25,000
Salary Reductions:
Contributions to UMA (for dental and glasses) $0 $1,000
Contributions to DCA (for Child Care) $0 $2,500
Taxable Income $25,000 $22,500
Payroll Taxes:
7.65% FICA $1,912.50 $1,721.25
15% Federal Tax $3,750 $3,375
3% State Tax $750 $675
Total Taxes $6,412.50 $5,771.25
After Tax Pay $18,587.50 $16,728.75
After Tax Expenses:
Dental Bills $675 $0
Eye Glasses $325 $0
Child Care $2,500 $0
Total Expenses $3,500 $0
Total Spendable Income $15,087.50 $16,728.75

Annual increase in take home pay: $1,641.25

There is no magic in this - it is simply how much money are you paying taxes on! Please keep reading.

General Rules & Information

What does Unreimbursed Medical mean? It is medical related expenses that you have to pay out of your pocket and you cannot get paid back from any other source such as an insurance policy, Medicare, Medicaid, etc. (Refer to IRS Publication 502)

What does Dependent Care mean? It is "qualified expenses" (as defined in IRS Publication 503) related to the care of children age 12 and under, or 13 and older if that person is incapacitated. To be eligible the dependent must actually live with you. You and your spouse must be at work in order to be eligible to claim the reimbursement (exception for a spouse that is a full time student or looking for work)

*Please refer to IRS Publications 502 and 5 03 for full details. These forms may be found online at www.irs.gov/forms_pub/pub.html.*

These general rules apply to both Unreimbursed Medical Accounts and Dependent Care Accounts:

  • RS rules prohibit the modification and/or revocation of elections before the beginning of the next plan year unless there is a change in dependent status (i.e., change in marital status, employment status, birth, adoption, death of a dependent, etc.) You have 30 days from when the status change takes place to make the modification and it must be consistent with the change in status.
  • The employer shall set up a separate account for the plan(s) and maintain a bookkeeping system (or use a Third Party Administrator) to track deposits and pay claims. There is no interest or earning credited to your account.
  • Use these plans carefully since the money that you deposit in them in a plan year must be used for expenses during that plan year or it is forfeited to the employer. So you "use it or lose it".
  • The IRS prevents you from transferring money between a DCA and a UMA, or vice versa.
  • You have 90 days from the end of the plan year to have your claims submitted for payment.
  • Each plan year you must elect the amounts you want to redirect from your paycheck.
  • With the Dependent Care Account you cannot be reimbursed more than you have deposited year to date. The Unreimbursed Medical Account must be paid in full up to your annual election when your claims are submitted.

This is important information for you to know, do not let it overwhelm you. This is not a difficult benefit to use.

Here are some helpful hints and some pitfalls to avoid.

  • When you are figuring the amount for your Unreimbursed Medical Account only count the expenses that you are sure you will incur. Do not speculate on having expenses, stay out of the pit fall of "I always have something that comes up". Use only known expenses!
  • When you are calculating daycare for your child, ask yourself these questions, they will help you avoid over funding and not being able to use all of your money.
    • "Do I have to pay when my child is not there?"
    • "Do I have to pay for time that we are on vacation?"
    • "Do I have to pay for holidays?"

How does this affect my Social Security Benefits? Because your Social Security is based on your taxable income this will have a minimal effect on your benefit. If you are close to retirement, you may want to speak to a tax advisor for further information on how your benefits may be affected.

What happens if I separate employment from the company? If you leave employment, either voluntarily or involuntarily, your coverage under this benefit will terminate. You may submit receipts for services that were incurred prior to your termination date. Or if COBRA is offered this benefit may be continued under a COBRA election.

Examples of Eligible Expenses for Unreimbursed Medical Accounts.

For detailed information refer to IRS Publication 502

  • Alcohol or Dependency Treatment
  • Ambulance Service
  • Artificial Limbs (only if reconstructive)
  • Birth Control Contraceptives
  • Braille Books and Magazines
  • Car Controls for the Handicapped
  • Contact Lens Solution
  • Crutches
  • Drugs (legal, prescription only or insulin)
  • Elastic Hose, medically prescribed
  • Eyeglasses or contact lenses
  • Hearing Assisting Cats
  • Hearing Devices
  • Medical Care Expenses For:
    • Acupuncture
    • Anesthetist
    • Chiropodist
    • Chiropractor
    • Dentist
    • Gynecologist
    • Hospital
    • Laboratory
    • Nurse
    • Obstetrician
    • Ophthalmologist
    • Optometrist
    • Oral Surgery
    • Orthodontics
    • Osteopathy
    • Pediatrician
    • Physician
    • Physiotherapist
    • Podiatrist
    • Psychiatrist
    • Psychoanalyst
    • Sanitarium
    • Surgeon
    • Surgery
    • X-Ray
  • Medical Copayments and Deductibles
  • Medically Prescribed Therapy
  • Needles, Syringes, and other Diabetes Supplies
  • Nursing Care
  • Oxygen Equipment
  • Non-prescription Drugs if your plan document allows for non-prescription drugs and it is for the treatment of a disorder and not for your general welfare
  • Rental of medical or healing equipment
  • Seeing Eye Dogs
  • Smoking Cessation Programs
  • Support or Corrective Devices
  • Telephone for the Deaf
  • Wheelchair
  • Wigs, if prescribed by a doctor

These list are meant to be a representation of types of expenses and not a complete list.

Cafeteria Plans or Section 125 plans, whichever name you prefer BAS provides all of the services to ensure that this is a valuable employee benefit.

Services provided:

  • Educational material for employees
  • Preparation of plan documents
  • Provide all necessary forms including employee's handbook
  • Setup and maintain accounts for Dependent Care and Unreimbursed Medical Expense Plans
  • Process and pay claims for Dependent Care and Unreimbursed Medical Expense, including explanation of benefits
  • Coordinate with payroll department on employee elections
  • Provide discrimination testing
  • Assist in setting up bank account
  • Keep documents up to date concerning any changes in law
  • Assist in providing information for 5500 report if required
  • Provide monthly and yearly reports

If BAS is providing additional services such as Medical, Dental and Vision claims administration, an employee may have claims from one of these benefits automatically submitted for processing in their Unreimbursed Medical account. BAS also offers electronic funds transfer into checking or savings accounts.