Section 125 Plans (cafeteria Plans)

Definition of "Section 125 plans (cafeteria plans)"

Shon McGuire real estate agent

Written by

Shon McGuireelite badge icon

Adams Cameron & Co. Realtors

Additions made by Congress in 1978 to the Internal Revenue Code that provide an employee benefit plan under which the employee makes an irrevocable decision to forego a portion of future income in exchange for receiving future benefits not subject to income tax at reception date. The employer deducts the cost of the employee's future benefits from present income as a business expense. These plans usually provide three options:

  1. Premium Conversion Employee contributes a proportionate share of the family health care costs with pre-tax dollars.
  2. Medical Reimbursement Account Employee is able to use a SALARY REDUCTION PLAN to pay with dollars on a pre-tax basis for medical expenses not covered by insurance; a separate medical reimbursement account is established for each employee.
  3. Dependent Care Reimbursement Account Employee is able to use a salary reduction plan to pay with dollars on a pre-tax basis for dependent care expenses.
An additional option sometimes provided for employees only (family members are excluded) is TERM LIFE INSURANCE for an amount up to $50,000 and DISABILITY INCOME INSURANCE. All employees must have equal access to the plans whether they are highly compensated or non highly compensated employees. Any monies left in the employee's account not used by the end of the year revert back to the company; this is known as the Use It or Lose It rule. As the employee incurs expenses, that employee applies for reimbursement through a form attached to the bill. When the administrator of the plan issues a check to the employee for the expenses, a statement is also provided that shows the amount remaining in the employee's account.

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Insurance Terms

State laws based on a model law of the National Association of Insurance Commissioners (NAIC) that allow insurers to set rates independently; or adopt those rates developed by a rating ...

Coverage for liability for damage to property of others from untimely discharge of fire-fighting sprinkler systems. This coverage is available as an endorsement to broad-form comprehensive ...

Inquiry conducted by a committee of the legislature of the State of New York in 1905 that looked at abuses of life insurance companies operating in the state. This study led to stricter ...

Insurance company that is a member of a rating bureau. The insurer usually joins such an organization when its statistical experience in a given line of insurance is not sufficient for it ...

Estimate of maximum dollar value that can be lost under realistic situations. For example, a fire or other peril occurs, but a sprinkler system works and a fire department responds in good ...

Type of benefit in which an employee obtains shares of stock in the company, the amount normally determined by the employee's level of compensation. ESOP acts as a leverage tool through ...

Structure. In general, company functions are delegated to several departments: actuarial, agency, claims and loss control, investments, legal, marketing, and underwriting. ...

Figure used in calculating a worker's primary insurance amount (PIA) to determine Social Security benefits in the following manner: calculate the number of years between the worker's ...

Percentage of income required by a retiree to maintain a desired standard of living during the retirement years. ...

Popular Insurance Questions