The Cafeteria Plan, under the Internal Revenue Service codes, allows for four types of accounts for the benefit of employees. Following is a description of these accounts and how they can benefit you.
We encourage you to participate in the following programs as they can be tremendously beneficial if you take a few moments and plan your expenses for the year. The four cafeteria plans include medical spending, dependent care, premium conversions, and parking and transportation.
The first type of account is a medical spending account. The purpose of this account is to allow an employee to be reimbursed out of their own( or employer contributed) funds on a pre-tax basis for any otherwise un-reimbursed medical expenses on themselves or their dependents. There is a list that follows that details eligible expenses under the Internal Revenue Service Code.
Essentially, as with the dependent spending account described later, the employee would elect a certain level of pre-tax salary reduction which would spread in equal installments over the number of pay periods per year and would be available for their reimbursement as expenses incurred. From the employee’s standpoint, the monies deferred from pay are put aside on a pre-tax basis, and must be claimed for expenses incurred during the twelve-month calendar year plan year. The employee would have up to 90 days following the end of the calendar year to submit expense reimbursement requests. Any money that the employee does not utilize out of their salary deferral would be forfeited back to the employer. This is called “use it or lose it”.
Most employees read the previous sentence and feel that this plan has too much risk for them to benefit. Quite the opposite is true. For an employee in a 25% tax bracket deferring a $1,000 into their reimbursement account, he/she will only need to claim $750 to be in a comparable position to where they would be if they had taken the entire $1,000 as gross pay and paid the taxes due. In essence, there is a corridor represented by the taxes that were not paid on the salary deferral that gives you a cushion to make sure you claim enough dollars to benefit.
It is imperative that an employee closely estimates the level of expenses they will incur. For example, if an employee wears eyeglasses and goes for a vision exam and new glasses annually, then this is a fairly reliable expense that is generally not covered by health insurance and for which money should be deferred intro a medical spending account. Similarly, orthodontics expenses for dependents, deductibles, drug card copays, and over the counter drugs can also be included. This reimbursement is immediately available to the employee at the level that they select to participate.
The second type of account is a dependent care spending account. The Internal Revenue Service allows an employee, in lieu of the tax credit on their tax return, to defer from their pay up to $5,000 per year on a pre-tax reimbursement of dependent day care or elder expense care expenses. It is necessary that the day care provider be a licensed provider with a tax identification number and this number must be provided to obtain reimbursement.
The employee is responsible for paying their day care provider and then submitting proof of payment, via a reimbursement form available from your personnel department, to the administrator who will process a tax-free reimbursement check for the employee at the next processing date. The amount of money that an employee elects to defer into the dependent reimbursement account will be divided equally over the number of pay periods per year and deducted from the employee’s pay on pre-tax basis.
The third type of account is called premium conversion or a Section 125 plan. This allows any payroll deducted premiums for the group insurance programs at your employer to be taken from your pay on a pre-tax basis. This program is automatically in place, and an employee does not need to participate to benefit from payroll deductions.
PARKING AND TRANSPORTATION
This last account is used more infrequently but allows for money to be set aside for parking and commuting expenses.
If you are unsure of what things these plans may cover, see our list of eligible expenses.