What is a Cafeteria Plan and what does it mean to you?
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.
What does Unreimbursed Medical mean?
Unreimbursed Medical 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?
Dependent Care 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 503 for full details. These forms may be found online at https://www.irs.gov/forms-pubs.*
These general rules apply to both Unreimbursed Medical Accounts (UMA) and Dependent Care Accounts (DCA):
This is just a brief overview, please refer to your plan document for details. If there is a conflict between this outline and the Plan Document, the Plan Document will prevail.
- IRS 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". If you employer elects to offer the grace period or rollover this can minimize the lose it part.
- The employer may choose to have the grace period. The grace period means a specific period following each plan year not to exceed two-and-one half months (75 days) in length. During the grace period participant and their dependents may incur claims that will be paid from any balance left over from the immediate plan year. Claims have to be submitted for payment within 90 days from the end of the plan year.
- The employer may choose to have the roll over. The roll over means a specific amount from the current plan that may be carried over into the immediate next plan year for reimbursement of medical expenses incurred in the immediate next plan year. The employer determines the amount of roll over not to exceed $500.
- If the employer choses to have the grace period it cannot have the roll over and vise a versa.
- 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 full, annual amount that you elect for your Unreimbursed Medical Account will be available any time during the plan year when you submit eligible claims.
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.
For detailed information on Eligible Expenses for Unreimbursed Medical refer to IRS Publication 502 OR See the FSA Store located on our website. The FSA store, located on the BAS homepage, has a place where you can calculate your savings for medical related expenses.