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Cafeteriaplan

FromWikipedia,thefreeencyclopedia

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.

Acupuncture Blindpersonsaccessories Contactlenses(including


Adoptionrelatedmedical (seeingeyedog,Braille replacementinsurance)
costs training,specialschooling) CosmeticSurgery(non
Airconditionerfiltersfor Capitalexpenditures(home electiveonly)
allergyrelief modificationsfor Crutches
Alcoholismtreatment handicapped) Deafpersons'accessories
Ambulanceservices Carmodificationsfor (hearingaids,special
Attendantforblindordeaf handicapped schooling)
student Childbirthprepclasses Dentalfees
Autoette (motheronly) Dentures
Birthcontrolpills Chiropractors Diagnosticfees
ChristianSciencetreatment Doctors'fees
Domesticaid(inhomenurse)
Drugaddictiontreatment Learningdisability(doctor Osteopaths
Dyslexialanguagetraining recommendedspecial Oxygenequipment
Electrolysis(medicalreasons schoolingfees) Prescriptiondrugs[b]
only) Legalexpensesrelatedto Psychiatriccare
Elevatorforcardiac medicalcondition Psychotherapists
conditions Lifetimemedicalcare Sexualdysfunctiontreatment
Eyeexamsandglasses prepaidretirementhome Sterilization
Fertilityenhancement Limbs(artificial) Stopsmokingprogramsand
Fluoridedevice Lodging(formedicalcare prescriptiondrugs
Guideanimals awayfromhome) Swimmingpool(forpolioor
Hairtransplant(surgicaland LongTermCareServices arthritistreatment)
medicalreasons) (qualifiedmedicalonly) Telephoneequipment(for
Hearingaids Meals(medicalcareaway hearingimpaired)
HMO's fromhome) Televisionclosecaption
Hospitalcare(inpatient) Medicalconferences(relating prescribedbydoctor
Indianmedicineman toillness) Vasectomy
Insulin Nursinghome(medical Weightlossprograms(doctor
Insurancepremiums(medical reasons) prescribedformedical
posttaxonly)[a] Nursingservices(homecare) reasons)
Ironlung Operation(legal,including Wheelchair
Labfees abortion) Wigs(alleviationofphysical
Laetrile(legaluse) Organdonor ormentaldiscomfort)
Lasereyesurgery Orthodontia Xrays
Leadpaintremoval Orthopedicshoes

a.Healthinsuranceprovidedthroughanemployee'sspouse'sgrouphealthplanisallowableonlyifthespousepaidforallor
partofthecoverageonanaftertaxbasis.[20]
b.PursuanttoRevenueRuling2003102,overthecounterdrugsthatareusedtoalleviateortreatpersonalinjuriesor
sicknessarenowreimbursablethroughhealthcareflexiblespendingaccounts.

OverthecounterexpenseseligibleforreimbursementunderaSection125cafeteriaplan

Eligibleexpenses

ThefollowingisalistofoverthecounteritemstheIRShasdeterminedtobeprimarilyformedicalcareand
eligibleforreimbursement.Overthecountermedicinesareallowableonlywithawrittenrecommendationfroma
physician.

Allergymedicine Firstaidcream Pedialyteforhydrationofan


Antacids Firstaidkits illchild
Antidiarrheamedicine Hemorrhoidmedication Pregnancytestkits
Bactine Incontinencesupplies Readingglasses
Bandaids,bandages Laxatives Rubbingalcohol
Bugbitemedication Liquidadhesiveforsmallcuts Sinusmedications
Calaminelotion Menstrualcycleproductsfor Sleepingaidstotreat
Carpaltunnelwristsupports painand/orcramps insomnia
Coldmedicines Motionsicknesspills Spermicidalfoam
Coldpacksandhotpacksfor Muscleorjointpainproducts Sunburnointmentsorcreams
injuries Nasalsinussprays,nasal Thermometers(earormouth)
Condoms strips Throatlozenges
Contactlenscleaningsolution Nicotinegum/patchesfor Visineandothereyeproducts
Coughdrops stopsmoking Wartremovertreatments
Diaperrashointments Painrelievers
Firstaidcream Pedialyteforhydrationofan
Dualpurposeitems

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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Categories: Employeebenefits TaxationintheUnitedStates Fiscalpolicy Publicfinance


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