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Section 125 Cafeteria Plans

A Cafeteria Plan allows employees to pay for certain costs on a pre-tax basis. Allowable group insurance premiums include those paid for medical insurance, dental insurance, vision care insurance, and group life insurance for coverage up to $50,000 per employee. In addition, employees can pay for otherwise non-reimbursed health care costs and day care costs by participating in a Heath Care Flexible Spending Account and a Day Care Flexible Spending Account.

Employees can decrease their federal and state income taxes as well as Social Security and Medicare taxes. Savings usually range from 25 percent to 45 percent of pre-tax contributions depending upon an employee’s actual tax rates.

Employers Reap Tax Savings Benefits

Employer tax savings can be as much as 7.65% of employee pre-tax contributions as a result of decreased Social Security and Medicare wages. These savings usually equal or exceed any design and administration costs.

In order to establish a Section 125 Cafeteria Plan, a written Plan Document, a Summary Plan Description, and other administration forms are required.

Non-Discrimination testing also must be performed to demonstrate that the Plan does not discriminate in favor of Highly Compensated and Key employees.

2013 "Use-It-Or-Lose-It" Provision

On October 31, 2013, the Department of Treasury issued a press release and informational fact sheet annoucing a major policy change relating to the health care Flexible Spending Account (FSA) that has many positive implications for all FSA participants.

The Department of Treasury has modified its "use-it-or-lose-it" provision to allow health care FSA participants to carry over up to $500 of their unused funds at the end of the plan year.

As a result of these changes, almost all employees with medical, dental, and vision expenses will be able to contribute ay least $500 to their health care Flexible Spending Account without fear of losing their funds if not used.

If you want to make changes for your 2014 Plan Year, you will need to do the following:

  • Provide for the carryover provision in your Section 125 Cafeteria Plan documents
  • If your Plan currently has a Grace Period, you will need to delete this provision from your 2014 Plan Year
  • Your plan documents do not need to be amended until the end of your next Plan Year (12/31/14 for calendar year plans.)
  • Emphasize this change with your employees in your upcoming open enrollment meetings.

For more information about offering Consumer-Driven Health Plans with your schools health plan, contact Linda Geist at 302-656-4944 or

To enroll online click here.

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