Is Your Cafeteria Plan Saving You Money?
What is a SECTION 125 "Cafeteria Plan?"
A Section 125 “Cafeteria Plan” allows you, the employee, to select from a list of available benefits that will meet your needs. The benefits that you choose are then paid for by you on a before tax basis. Salary reduction means that you are able to use “pre-tax” dollars to pay for certain benefits that you may have previously paid for with “after-tax” dollars.
 
How can this plan help you?
By implementing this plan, your employer is helping you reduce your taxes and increase your spendable income. The cost saving advantage of the plan is simple. Any benefit costs or insurance premiums you pay under the plan are paid on a pre-tax basis. The example below illustrates the advantage of the Section 125 Plan in comparison to a plan without the benefits.
 
Sample Paycheck Analysis
WITHOUT SECTION 125 WITH SECTION 125
Average Monthly Salary $2,000
Average Monthly Salary $2,000
Less Estimated Federal
Less your out-of-pocket
& State Taxes (20%) - 400
Benefit Costs - 250
Less Estimated FICA  
(7.65%) - 153
Taxable Income $1,750
 
  $1,447
   
   
Less Estimated Federal  
 
Less your out-of-pocket  
& State Taxes (20%) - 350
 
Benefit Costs - 250
Less Estimated FICA  
 
* (7.65%) - 133
Spendable Income $1,197
Spendable Income $1,267
 
By utilizing the Section 125 Flexible Benefit Plan, the above paycheck has $70 more per month of spendable income.
 
* If you are subject to FICA taxes, there might be a slight reduction in your social security benefit due to the reduction of FICA contributions.
 
If your District has a Section 125 plan, participating in the plan could save you money…
A Section 125 Plan means that current after-tax expenditures for items such as medical insurance, dental, vision, disability income, dependent care costs, and some medical expenses not covered by insurance can now be paid for with pre-tax dollars. You may have more dollars available to purchase other benefits you may need or available as increased take-home pay.
 
How do I enroll in a Section 125 Plan?
If your district has a plan, you will probably just need to complete a simple election form to enroll. In most cases, you must re-enroll in the plan each year to continue using the plan.
 
Can I make changes in my election during the plan year?

The only time tax law regulations will allow you to make a change is if there is a valid change in your status affecting your need for a benefit. Some examples of a valid status changes include:

  • change in legal marital status
  • change in number of dependents
  • termination or commencement of employment; change in work schedule
  • dependent satisfies or ceases to satisfy dependent eligibility requirements
  • change in residence or worksite
These examples may not be all-inclusive. If you elect to participate in the medical expense reimbursement account, election changes are limited, in most cases, to ceasing plan participation because of termination of your employment.
 
What is a qualified medical expense for reimbursement under a Section125 Plan?
Most medical expenses not reimbursed by any other source or an insurance plan, such as deductibles and co-insurance, and items not covered by insurance, such as vision care, dental costs, and routine physicals, are qualified medical expenses. These expenses may be either for you or for your dependents. You may only be reimbursed for expenses incurred for services rendered during the plan year, not for services rendered in a different plan year but paid in the current plan year. However, you may submit your claim for reimbursement as late as 90 days after the end of the plan year during which you incurred your expenses.
 
Who is considered a qualified dependent for reimbursement of dependent care expenses?
Your dependent(s) under the age of 13 or your dependent or spouse who is physically not able to care for himself or herself is considered to be a qualified dependent if their dependent care expenses could qualify for the federal income tax credit on your tax return.
 
What happens if I don't incur enough expenses to get back the money deposited in my reimbursement accounts?
Any expense dollars not used for expenses are lost. It is very important to be conservative and accurate in estimating your expenses for the plan year.
 
Can I take the tax credit for dependent care or the medical expense deduction on my income tax return if I am in this Plan?
No. Expenses reimbursed under this plan may not be used when calculating your medical expense deduction or the dependent care tax credit. Because it is sometimes more advantageous to take the dependent care tax credit on your tax return than to participate in the dependent care expense reimbursement account, you should discuss which alternative is the best for you with your tax advisor.
 
Dependent Care Expense Accounts
Your Dependent Care Expense Account may be used to reimburse yourself for eligible dependent care expenses incurred to allow you (and your spouse if you are married) to work or look for work. You may allocate up to $5,000 per tax year for reimbursement of dependent care services ($2,500 if you are married and file a separate return).
 
Unreimbursed Medical Accounts
Your Unreimbursed Medical Expense Account may be used to reimburse yourself for eligible medical expenses, including co-pays and deductibles, incurred for yourself, your spouse, and your eligible dependents. You may allocate per plan year for reimbursement of qualified expenses. Examples of eligible medical expenses may include, but are not limited to:
 
Eligible Expenses
Acupuncture
Alcohol and drug
rehabilitation
Ambulance
Anesthetist
Artificial limbs and teeth
Birth control pills
Chiropodist
Chiropractor
Christian Science
practitioners
Certain corrective surgery
Dental care
Eye exam, eyeglasses,
contact lenses, contact lens solutions and enzyme
Gynecologist
Hearing aids and
batteries
Hospital and skilled
nursing facility
Insulin
Laboratory fees
Lip-reading lessons
Medical Examinations
Midwife
Nursing care
Obstetrics
Optometrist
Orthodontia expenses as
treatment is provided
Osteopath
Outpatient care
Pediatrician
Physical therapy provided
by licensed therapist
Physician
Podiatrist
Practical nurse
Prescription drugs (only
those requiring a prescription by a doctor for its use)
Psychiatrist
Psychologist
Rental or purchase of
medical equipment
Stop-smoking program
Supportive or corrective
devices
Surgery
Transportation expenses
relative to illness based on IRS standard mileage allowance
Weight loss program for
obesity
 
Ineligible Expenses
Cosmetic procedures
Dancing or swimming
lessons
Expenses not incurred
during plan year
Massage therapy
Swimming pools, hot tubs,
exercise equipment
Teeth whitening
Vacation
 
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