Section 125 Flexible Spending Account (FSA)

A Cafeteria Plan established with the assistance of GMA reduces your taxes and could enhance your benefit package. How? By allowing you to pay for certain benefits such as:

1.  Employee contribution toward group or individual medical insurance premiums.

2.  Amounts for medical expenses that are not covered by your other insurance (such as deductibles or co­payments).

3.  Day care for a dependent child, disabled spouse or dependent parent.

You can set aside certain amounts of your salary, before taxes, to pay for these benefits, therefore, reducing your taxable income, therefore, reducing your taxes. In some situations, this could increase your take home pay, due to the reduction in payroll taxes.

The GMA program is intended to assist an employer in establishing a Cafeteria Plan that qualifies under Section 125 of the Internal Revenue Code. This qualification means you are entitled to pay for selected benefits with pre-tax salary dollars.

Flexible Spending Account Example  

Exactly how will a Cafeteria Plan effect my employees and my organization?
The main advantage of these programs, vs. regular employee benefits, is the tax savings realized by both employees and their employer. Utilizing a cafeteria plan, an employee can spend the same money for the same benefits they currently have and receive more take home pay!  Below is an illustration of an employee's monthly take home pay before and after implementing a Cafeteria Plan.

EXAMPLE: Married, $25,000 annual salary

1.  Increase in employee spendable income: $142.10 a month, $1,705.20 per year!

2.  Employer's FICA contribution savings: $43.22 a month, $518.64 per year !  Worker’s compensation premiums are also saved!   Typically, the employer savings are used to pay for the flexible spending card or a basic health insurance plan.

What is a Cafeteria Plan?

A Cafeteria Plan is one of the most effective ways of allowing employees to pay their health insurance benefit premiums, medical care and certain other allowable items with pre-tax dollars.  This plan will accrue significant savings to both the employee and employer.  Most employees will realize an increase in take home pay and an employer will reduce certain payroll taxes which can result in significant savings.   The Cafeteria Plan contains three basic components.  It is made possible by Sections 125 and 129 of the Internal Revenue Service (IRS) Code.  However, for our discussion, we will refer to both sections as a Cafeteria Plan.  The three components are as follows:  

Section 125 Plan

A. Un-reimbursed Medical Plan 

This plan allows employees to elect to "pre-tax" certain health care expenses that are not reimbursed by the underlying group insurance (for those that are insured) plan made available through the employer or that may have some restrictions.  The amounts may include items such as co-payments, orthodonture, mental health, dental, chiropractic, prescription drugs, physical therapy, over the counter medicine such as aspirin, etc.  Again the lower gross wages will benefit those employees that qualify for the Earned Income Credit (EIC). 

B. Premium-Only Plan 

This plan allows employees to elect to pay for their portion of health insurance premiums, for the company sponsored employee health insurance plan, with "pretax" dollars.  By paying these premiums with before-tax dollars the employee lowers taxable gross income and saves money on federal and state income taxes, including FICA.  Furthermore, for those employees earning wages that meet the Earned Income Credit (EIC) limitations the lower gross income will actually increase the EIC, therefore these employees realize a higher credit amount because of the lower gross taxable income. 

Section 129 Plan

Dependent Care Plan

This plan allows single or married employees to "pre-tax" their cost for dependent care.  There is a current limitation of $5,000 per year.  This deduction is in place of taking the Child and Dependent Care Expenses allowed on the personal income tax return.  Since this section also lowers the gross taxable income, this plan election should increase the EIC resulting in an increased tax credit. 

Questions and Answers (Q&A)

1.         What is required to establish a Cafeteria Plan?

In order to establish a Cafeteria Plan the employer must have a written approved Plan Document that meets the requirements of the Internal Revenue Sections 125 and 129.  Each participant must be given a Summary Plan description which briefly explains the plan.  The Plan Document must be filed with the Department of Labor. 

2.         How does an employee elect to join a Cafeteria Plan?

Annually each employee must be given an opportunity to join the Plan.  Any employee electing to join is given an enrollment form.  This form includes the types of plans that are offered.  The employee selects the plans of his/her choice.  The form is used as the authorization for deductions as well as by the Plan Administrator for documentation requirements of IRS Code Sections 125 and 129.  There are certain restrictions with respect to opting out of the plan and changing amounts of deductions. 

3.         How does the employee elect to deduct the premiums or other medical costs from their

            salary?

On the date of initial inception of the plan and once a year thereafter each participant estimates the total dollar amount of un-reimbursement medical expenses and dependent care they expect to incur.  They sign a payroll deduction form which authorizes the employer to deduct the cost of premium and other elective medical or dependent care expense.  As the employee incurs the elective expenses, they pay using the GMAFLEX MasterCard.  Vendors that do not accept MC are paid by the employee which are later reimbursed by submitting the bills to a third party administrator (TPA) for reimbursement. The TPA also makes the proper payment to the health insurance carrier(s) as applicable.

4.         What if the employee overestimates the expenses?

According to the rules governing Cafeteria Plans, the employee "loses” the excess money in the fund and it is either refunded to the employer to distribute equally among the plan participants or left with the TPA to defray the cost of administration.  Thus, from the employee's point of view you must “use it or lose it." 

5.         What if the employee underestimates their expenses?

You cannot just increase your deduction once you have made your annual election because you have underestimated.  Once the fund is exhausted, the remaining bills for that calendar year will be paid with after-tax dollars. 

6.        What are the additional tax reporting requirements?

There are certain tax filings that must be made annually as well as filing certain information with the Department of Labor.  However, the compliance is handled by theThird Party Administrator (TPA).  The cost of this TPA is normal and can be offset by the significant tax savings. 

7.         What does the Cafeteria Plan cost the employer?

GMA will make its contracted TPA provide the service at a low monthly administration fee charged to each employer (which comes from their tax savings).  The TPA maintains the costs low by allowing the TPA to offer (without obligation) low costs accidental and similar policies to the employees.  The annual compliance form is a service provided by the TPA.