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Cafeteria Plan: A Comprehensive Guide to Flexible Benefits
Definition & Meaning
A cafeteria plan, also known as a Section 125 plan, is a flexible benefits program that allows employees to choose from a variety of pre-tax benefits. This plan is designed under the Internal Revenue Code, enabling employees to select benefits from a "menu" that may include options like medical, dental, vision, accident, disability, and group term life insurance. Additionally, it may provide reimbursements for medical expenses or child care costs. Once employees decide how much of their salary to allocate to the plan, these choices are generally irrevocable for the plan year, except in specific situations such as changes in marital status or the number of dependents. Unused funds at the end of the plan year are typically forfeited.
Table of content
Legal Use & context
Cafeteria plans are commonly used in employment law and benefits administration. They fall under the category of employee benefits and tax law, allowing employers to offer flexible compensation options while minimizing payroll taxes. These plans can be particularly beneficial for employers looking to enhance their benefits package without significantly increasing costs. Users can manage cafeteria plans through various legal forms and templates, which can be found on platforms like US Legal Forms.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
(Hypothetical example) An employee decides to allocate $200 a month from their salary to a cafeteria plan. They choose medical insurance, dental coverage, and child care reimbursement. At the end of the year, if they only use $1,800 of the $2,400 allocated, the remaining $600 will be forfeited.
Relevant laws & statutes
Major statutes relevant to cafeteria plans include:
Internal Revenue Code Section 125 - outlines the tax treatment of cafeteria plans.
Comparison with related terms
Term
Definition
Key Differences
Cafeteria Plan
A flexible benefits plan allowing pre-tax benefit choices.
Offers a range of benefits with pre-tax options.
Flexible Spending Account (FSA)
A type of savings account that allows employees to set aside pre-tax dollars for eligible expenses.
Typically limited to medical expenses and has a use-it-or-lose-it policy.
Health Savings Account (HSA)
A tax-advantaged account for individuals with high-deductible health plans to save for medical expenses.
Funds roll over year to year and can be invested.
Common misunderstandings
What to do if this term applies to you
If you are considering enrolling in a cafeteria plan, review the available benefits carefully to determine which options best meet your needs. Make sure to understand the rules regarding elections and forfeitures. If you need assistance, consider using US Legal Forms' templates to help manage your enrollment and any necessary documentation. If your situation is complex, consulting a legal professional may be advisable.
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