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Section Plans Cafeteria Plans

Definition of "Section 125 plans (cafeteria plans)"

Carol Camilli-Montgomery
  Keller Williams Realty

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.

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