What Cafeteria Plans Mean For You
Cafeteria Plans, aka Flexible Spending Plans, are a part of Section 125 in the IRS code.
- Only for employees of companies who offer such plans
- Pre-tax benefit: BOTH employer and employee save on Federal Income taxes and Social Security/Medicare contributions with pre-tax deductions from your paycheck
- Most common uses: Health Care expenses and Dependent Care expenses in a Flexible Spending Account (FSA)
Health Care expenses
Many service providers that employers hire to host these accounts offer these of a Debit Card. It’s taken right out of your contributions/savings to the plan.
You must submit a detailed statement to the service provider to prove the eligibility of the expense within a certain amount of time (often within 30 days).
You also have the option to mail in claim forms with receipts as well, and many companies allow you to do all of this online and have the funds deposited into your bank account.
The Benefit: Let’s use this example: During Open Enrollment you fill out the form and tell your employer you want $1,000 to go into FSA. You get paid every other week so $38.46 comes out of your paycheck BEFORE TAXES ARE TAKEN OUT. In one year you contributed $1,000 to the account, had use of those funds during the year to help pay for doctor prescribed medical expenses, co-pays, hospital expenses, etc.
Regardless of your income, $1,000 of your income was not subject to Fed Income Tax and Social Security or Medicare contributions. If you file your taxes and are in a 20% tax bracket (depending on income, dependents, deductions $40K – $140K) you will LEGALLY save $275 in taxes.
The money you used from your Flex Spend account contributions you would have paid anyway so this is an excellent way to manage your money wisely.
One caveat: It is a use-it-or-lose it plan. You have a couple of months into the next year to send in any receipts proving expenses you use the Debit card for or send in receipts to get manual reimbursement.
Dependent Care Expenses
Very similar to the Health Care plan, but used to reimburse you for the following qualified expenses:
- Child daycare
- After-school latchkey or Day camp programs
- Nursery School
- Nanny meals & lodging expenses
You won’t be provided with a Debit card for this purpose. However, some service providers allow you to fill out an authorization form that sets you up for automatic reimbursements. All you need to do is upload (or send by mail) the receipts to prove you paid the expenses.
What we do: Pay for the expenses out of our personal accounts. Then we simply fill out an on-line claim form, upload the receipts from the day-care, and in a few days the money is deposited into our checking account.
The Benefit: Same as with the Health Care expenses: Example: $4,000 into plan ($153.84 per bi-weekly paycheck) will save you $1,106 in taxes!
Same caveat: It is a use-it-or-lose it plan. You have a couple of months into the next year to send in any receipts proving the expenses to get reimbursed.
To learn more:
For detailed information go to http://www.irs.gov/pub/irs-pdf/p969.pdf and read all about IRS Publication 969, rules governing Health Savings Accounts and other Tax-Favored plans.
Or, let me Google that for you: http://lmgtfy.com/?q=irs+cafeteria+plan+dependent+care
Other options that may be available to you:
Some companies also provide Parking and Transit plans, and there is even an option for Adoption Assistance: All pre-tax contributions in a similar plan.
For more information go to http://www.irs.gov/publications/p15b/index.html (IRS Publication 15B)