Health Insurance Types ? Cafeteria Plan

A cafeteria plan, also known as Section 125 of regulations of section 125 of the Internal Revenue Code is a separate written plan maintained by an employer, or maintained by a third party called a third party administrators.

It is highly recommended that smaller companies desiring to offer such benefit plans use a TPA (Third Party Administrator) since the administration of such plans is not only intricate but, if mistakes and miss steps are made the fines for non compliance could be astronomical

However the plan is administrated it provides participants/ employees an opportunity to receive certain benefits on a pretax basis. Those who take advantage of a cafeteria plan must be permitted to choose among at least one taxable benefit (such as cash) and one qualified benefit.

We can best explain a "qualified benefit" is a benefit that does not defer compensation and is excludable from an employee's gross income under a specific provision of the Code, without being subject to the principles of constructive receipt. OK. Let me explain farther, Health insurance for the employee can be a "qualified benefit" give to the employee within the employee's compensation but not singled out and taxed. Other insurance products such as accident and health, adoption assistance, dependent care assistance, group-term life insurance coverage to limits and health savings accounts can be considered qualified.

Beware! Archer medical savings accounts or long-term care insurance may not be considered "qualified" and may have to be paid in "post tax" dollars

Every written plan must specifically describe all benefits and establish rules for eligibility and elections. A section 125 plan is the only means by which an employer can offer employees a choice between "taxable" and "nontaxable" benefits without the choice causing the benefits to become taxable. Employer contributions to the cafeteria plan are usually made pursuant to salary reduction agreements between the employer and the employee in which the employee agrees to contribute a portion of his or her salary on a pre-tax basis to pay for the qualified benefits. Let us here hive you an example. The employee is offered a bag of money; let's use $500 per month.

The employee will not be taxed on that money because salary reduction contributions are not actually or constructively received by the participant. From that bag of money an employee may choose a selection of products to purchase, hence "cafeteria"

Cafeteria plans may make benefits available to employees, their spouses and dependents.

In some cases a plan may also allow inclusion coverage of former employees, but cannot exist for that purpose only.

Although generally there is no filing requirement for a cafeteria plan we highly recommend use of a third party administrator to make sure strict compliance is adhered to.

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