Section 125 Cafeteria Plans (POP & FSA)
Section 125 plans afford you the opportunity to use pre-tax dollars to pay for your health care expenses, from Premium payments to qualified medical, dental, and vision expenses. The Premium Only Plan (POP) is the building block of the Section 125 plan; this is the portion that allows you to pay group insurance premiums with pre-tax dollars. In addition, your POP plan is the foundation for all other tax savings plans such as Flexible Spending Accounts and Health Savings Accounts.
Pre-tax Savings – Being able to pay for your benefits on a pre-tax basis, you are looking at a 25-30% savings on your contributions, when compared with using after tax dollars.
Control – Leveraging the pre-tax benefits of the Section 125 plan, this allows you to control how to use your income to adequately cover the expenses for you and your family. By participating in FSA programs, you are able set aside pre-tax dollars that you can use to pay for out-of-pocket expenses that you know may be incurred throughout the year.
There are three primary types of Cafeteria Plans:
1. Premium Only Plan (POP)
When you are paying for any portion of your health insurance premium, a POP deducts your portion from payroll on a pre-tax basis, resulting in lower employee taxes. POPs are the most common component of all Cafeteria Plans and are most often used in conjunction with Flexible Spending Accounts and Dependent Care Assistance Plans. Eligible plans are limited to the employer’s group plan(s) such as medical, dental and vision, as well as a number of voluntary products.
2. Flexible Spending Account (FSA)
General Purpose & Limited purpose An FSA allows an employee to fund certain medical expenses on a pre-taxed basis through salary reduction to pay for out-of-pocket expenses that aren’t covered by insurance (for example, annual deductibles, office co-payments, prescriptions, and orthodontia). The average working employee in America spends more than $1,000 annually on these types of benefits. By participating in a FSA, an employee’s taxable income is reduced, which increases the percentage of pay they take home.
- General Purpose FSA – Allows you to use pre-tax dollars to spend on any qualified medical, dental, vision, and limited OTC items.
- Limited Purpose FSA – This is available for employees enrolled in an HSA and only covers qualified dental and vision expenses. This particular FSA program was designed to help employees fully utilize the savings in their HSA, without having to drain down their funds for big ticket items such as Lasik eye surgery or Orthodontia.
3. Dependent Care Assistance Plan (DCAP)
The Dependent Care Assistance Plan is an attractive benefit if you may have day care, nursery school, preschool, before/after-school care, adult day care facilities, and adult in-home day care. Many employees don’t take advantage of this benefit and may be unaware of the significant tax savings. You have the ability to hold back as much as $5,000 annually of pre-tax salary for dependent care expenses, with Dependent Care you only receive a Federal and FICA deduction. Persons qualified for care under a DCAP include:
- A dependent that is under the age of 13 when the care was provided and can be claimed as an exemption on a participant’s income taxes
- A dependent who is mentally or physically challenged and can be claimed as an exemption on a participant’s income taxes
- A spouse who is mentally or physically challenged
Uniform Coverage Rule applies to FSAs and states an employee’s annual election amount must be made available from the beginning of the plan year. For example, if you elect $2,000 for the FSA plan year and have a $1,000 medical claim in the first month, it is required that you are paid or reimbursed in full for that expense. The employer will collect the full election amount back from you throughout the course of the plan year.
*Once a plan election is made for the year, the election is irrevocable unless the employee incurs an IRS-defined qualifying event like marriage, divorce, birth or child adoption, employment status change, etc.
Use-it-or-Lose-it-Rule applies to both FSAs and DCAPs and states the funds you elect to set aside must be utilized by the end of the plan year, otherwise, any unused funds are distributed back to the employer. It is often very rare that an employee is not able to spend their full election amount by the end of the plan year, but we always recommend that employees stay on top of their FSA election amounts to ensure they do not lose what they have set aside.
Debit Card Access
Your employer may or may not have elected to make the debit card available to you. When the Debit Card is used, our staff loads the card with all the office visit and prescription drug copayment amounts, so the card will auto substantiate when it is swiped to pay for these common expenses. The Debit Card helps to alleviate some of the burden of constantly sending in receipts for reimbursement. Once the Debit Card is swiped, the you will receive an email, telling you whether the payment was processed or if you need to submit paperwork to our office for adjudication.
*The Debit Card cannot be used with the DCAP FSA; you can only be reimbursed from a DCAP by submitting receipts for Dependent Care expenses to our office. This is due to IRS regulations.
You have access to your account via the web or smart phone app 24/7. You have the ability to view your account balance as well as all claims that were submitted year to date. You can access your account information from the home page of this site, if you have never before accessed our online services, please reference your open enrollment materials to walk through the steps in creating your account. If you do not have these materials, please contact your benefits manager for this information.
As with all lines of our administration, we are here for you and we want to do the very best to ensure that you properly utilize your benefits, our staff is here to assist you with anything and everything. If you have any questions about what you need to submit or how a Section 125 plan may benefit you, please contact us.