Whether you call it the IRS-125 plan, a POP, or an FSA, it`s all the same. The cafeteria benefit plan, created by the Internal Revenue Service, is a tax break for businesses and employees that many people do not take advantage of.
“When I talk to people and ask if they`ve been involved in the cafeteria plan, I have to tell them it doesn`t involve food,” said Renee Roberts, personnel officer for the Mississippi Employment Security Commission. “The cafeteria plan is where you pay for your health benefits, unreimbursed medical, dental, child care and other expenses, using before-tax dollars. One lady thought I asked her if she wanted to eat in the cafeteria.”
Authorized by Section 125 of the Internal Revenue Code, employees may voluntarily elect to reduce their salaries on an annual basis and have the employer pay for elected benefits with pre-tax dollars.
“This is so complex, we have a third party administrator. I`m the one-minute explanation (person), then we refer employees to the administrator for more-detailed questions,” Roberts said. “Some policies are not eligible. For example, if you have a cancer policy, where you build benefits every month you are not stricken with cancer and maintain the policy, the policy is ruled invalid, and that amount cannot be sheltered.”
Covered benefits include standard health plans, dependent coverage and multiple deductibles, dental care plans and orthodontics, life insurance and disability benefits. The IRS sets limitations at “a reasonable allowance for salaries and other compensation for personal services actually rendered.”
“If you know you`re going to have a yearly physical, if you wear contacts and you`ve got to have a root canal done, and you know all of this is coming, you can set aside a certain amount to be withheld before taxes from your check,” Roberts said. “Then you can file a claim on those benefits that are occurring during that benefit period. However, if I`m paying on my dentist bill from four years ago, I can`t claim that. If I`m paying on work done in 1998, I can claim that.”
The cafeteria benefit plan is also known as a Premium Only Plan (POP), a Premium Conversion Plan, a Flexible Savings Account (FSA), a Benefit Administration Plan, among others. But the system is the same