A Cafeteria Plan is an employee benefit program. Designed to take advantage of Section 125 of the Internal Revenue Code a Cafeteria Plan allows employees to pay certain qualified expenses (such as health insurance premiums) on a pre-tax basis, thereby reducing their total taxable income and increasing their spendable/take-home income. Funds set aside in FSA accounts are not subject to Federal, State, or Social Security taxes. On average, employees save from $.25 to $.49 for EVERY dollar they contribute to the FSA.

Premium Only Plans (POP)

Employers may deduct the employee’s portion of the company-sponsored insurance premium directly from said employee’s paycheck before taxes are deducted.  

Flexible Spending Plans (FSA)

Employees may set aside in a Flexible Spending Account (FSA) a pre-established amount of money per Plan year on a pre-tax basis. The employee can use the funds in the FSA to pay for eligible medical, dependent care, or transportation expenses.  

Benefits to the Employer

Employers may add a FSA Plan as a key element in their overall benefit package. Because an FSA Plan offers a tax-advantage, employers experience tax savings from reduced FICA, FUTA, SUTA, and Workers’ Compensation taxes on participating employees. These tax savings reduce or eliminate altogether the various costs associated with offering the Plan. Meanwhile, employee satisfaction is heightened because participating employees experience a “raise” at no additional cost to the employer.

Increased participation equals greater tax savings to the employer. Thus, to promote participation in the Plan, employers may wish to contribute to each employee’s FSA account. 

Benefits to the Employee

An employee who participates in the FSA must place a certain dollar amount into the FSA each year. This “election” amount is automatically deducted from the employee’s check (for that amount divided by the number of payroll periods). For example, an employee is paid 24 times a year, and elects to put $480.00 in the FSA. Thus, $20.00 is deducted pre-tax from each paycheck and is held in an account (by the Plan administrator) to be reimbursed upon request.