A Cafeteria Plan, sometimes called a “Flexible Spending Account” or FSA, is available to taxpayers under §125 of the Internal Revenue Code. It derives its name from the earliest plans of this form that allowed employees to choose between different types of benefits, similar to the ability of a customer to choose among available items in a cafeteria. Qualified cafeteria plans are excluded from gross income. To qualify, a cafeteria plan must allow employees to choose from two or more benefits consisting of cash or qualified benefit plans.
A cafeteria plan increases spendable income in an employee’s paycheck by reducing Federal, state and Social Security taxes. It allows certain expenses like daycare, insurance premiums and most out-of-pocket medical costs to be paid before taxes are deducted from a paycheck. Employees generally have average savings that range from $.25 to $.49 for each dollar contributed to the FSA.
There are many advantages for employers that offer cafeteria or FSA plans as part of their overall benefit packages. Employers decrease their tax liability from reduced FICA, FUTA, SUTA, and Workers’ Compensation taxes on employees that participate in the plans. It also, in effect, is like a raise for participating workers, which certainly increases workplace morale.
Participating employees must place a certain dollar amount into the plan annually. The plan year is one full year or 365 days, and typically begins on the first day of the month. Short plan years are allowed in certain instances. The amount of the employee’s election is automatically deducted from the employee’s paycheck. So, if an employee is paid 24 times a year and elects to put $720 in the FSA, then $30 will be deducted from each paycheck prior to the payment of any taxes and held in an account to be reimbursed upon the employee’s request.
If you have questions as an employee about whether you should participate in a cafeteria plan or flexible spending account offered by your employer, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
