Cafeteria Plan FAQ
What is a Cafeteria Plan?
A cafeteria plan is a separate written plan that meets the specific requirements and regulations of Section 125 of the Internal Revenue Service Code, and is maintained by an employer for employees.
The plan can offer a number of qualified selections, including medical, accident, disability, vision, dental, group term life insurance, adoption assistance, dependent care assistance, and health savings accounts, including distributions to pay long-term care services. It can reimburse actual medical expenses and pay children's day care expenses. The Cafeteria Plan benefits are paid for with pre-tax earnings.
Who is eligible for benefits under a Cafeteria Plan?
Under a Cafeteria Plan, benefits may be made available to employees, their spouses and dependents. It may also include coverage of former employees under certain circumstances, but may not be set up specifically for former employees.
What are the requirements for filing a Cafeteria Plan?
If all you have is a cafeteria Plan, you are not required to file Form 5500 or Schedule F. Be aware, though, if you have a welfare benefit plan, you may be required to file a return for that plan under Department of Labor regulations. For more information, Refer to Form 5500 Instructions or contact the U.S. Department of Labor.
How does a Cafeteria Plan work?
Employer contributions to the Cafeteria Plan are usually made pursuant to salary reduction agreements between you and your employer in which you agree to contribute a portion of your salary on a pre-tax basis to pay for the qualified benefits. Since salary reduction contributions are not actually received by you, those contributions are not considered wages for federal income tax purposes. Plus, the contributions generally are not subject to FICA and FUTA taxes. Without the Cafeteria Plan, these expenses are paid for with after-tax dollars. For a more thorough understanding of the Cafeteria Plan rules, see the Proposed Regulations under the IRS Code, Section 125.
What is a Flexible Spending Arrangement?
Flexible Spending Arrangement (FSA) is a type of Cafeteria Plan benefit funded by salary reduction. Expenses incurred for certain qualified benefits will be reimbursed to the employee. Dependent care assistance, adoption assistance, and medical care reimbursements are possible qualified benefits that may be offered in an FSA. The benefits are subject to an annual maximum and any funds left in the account at the end of the plan year reverts back to your employer. FSA funds cannot be carried over into the next plan year.
An employer has a Cafeteria Plan, which offers dependent care assistance, and an employee's benefits exceed $5,000. How is this reported on a W-2 Form?
Generally, an employee can exclude from gross income up to $5,000 of benefits received under a dependent care assistance program each year. For married employees, filing separate claims, the limit is reduced to $2,500. The exclusion cannot exceed the earned income of either the employee or the employee's spouse. The total dependent care benefits the employer paid to the employee or incurred on the behalf of the employee (including amounts from a Section 125 plan) should be reported in Box 10 of Form W-2. Amounts over $5,000 should be included in Boxes 1, 3, and 5, as "wages," "social security wages" and "Medicare wages". Refer to IRS Publication 535 and Publication 15-A for additional information.
What reimbursements under a Cafeteria Plan is not subject to FICA, FUTA, Medicare tax or income tax withholding?
Usually, qualified benefits under a Cafeteria Plan are not subject to FICA, FUTA, Medicare tax, or income tax withholding. According to the IRS Section 125 Code, "Group-term life insurance that exceeds $50,000 of coverage is subject to social security and Medicare taxes, but not FUTA tax or income tax withholding, even when provided as a qualified benefit in a Cafeteria Plan. Adoption assistance benefits provided in a Cafeteria Plan are subject to social security, Medicare, and FUTA taxes, but not income tax withholding. If an employee elects to receive cash instead of any qualified benefit, it is considered as wages and is subject to all employment taxes. For more information, see Publication 535, Chapter 5 or Publication 15-A."
Can a Cafeteria Plan make advance reimbursements for medical expenses?
Employees can be reimbursed only for allowable, documented expenses incurred during the plan year, after the expenses have been verified.
An employer has a Cafeteria Plan which offers health care benefits to domestic partners. Does a domestic partner and his or her child qualify to be covered under the health plan?
Cafeteria Plans may offer health insurance to employees, their spouses and their dependents. The domestic partner and dependents in this case cannot actually participate in a Cafeteria Plan because they are not employees, but the plan may provide benefits to them. A domestic partner may not select or purchase benefits offered by the Cafeteria Plan, but the domestic partner may benefit from the employee's selection of family medical insurance coverage or of coverage under a dependent care assistance program.