A Section 125 Cafeteria Plan, named after the portion of the IRS code that governs it, offers employees the ability to choose from a variety of pre-tax benefits, effectively reducing their taxable income and increasing take-home pay. Here’s an updated overview based on the latest 2024 guidelines:
Types of Benefits Offered:
- Health Savings Accounts (HSAs)
- Flexible Spending Accounts (FSAs)
- Dependent Care Assistance Programs (DCAPs)
- Group-term Life Insurance
- Health and accident insurance, among others.
Employees can allocate pre-tax earnings to these benefits, reducing their federal income and FICA tax liabilities. Some states also provide tax advantages for participating in these plans.
Contribution Limits: For 2024, employees can contribute up to $3,200 to health FSAs under cafeteria plans. Any unused amounts can be carried over to the next year up to $640, enhancing the flexibility and appeal of these plans.
Plan Design and Compliance: Employers must adhere to strict IRS guidelines, including drafting a written plan document that specifies the benefits, eligibility, and procedures for the plan. It's essential to ensure that these plans do not discriminate in favor of highly compensated employees to maintain their tax-advantaged status.
Advantages:
- Offers significant tax savings for both employees and employers.
- Provides flexibility, allowing employees to tailor benefits to their needs.
- Helps employers attract and retain talent by enhancing their benefits package.
Challenges:
- The "use it or lose it" rule for FSAs means employees need to plan carefully to avoid losing unused funds.
- Administrative costs and the need for ongoing compliance monitoring can be burdensome for some employers.
Regulatory Updates: Recent updates, like the expansion of change in status rules, allow more flexibility for employees to make mid-year changes to their elections under certain conditions, such as family members gaining coverage through an insurance exchange during open enrollment periods or special enrollment periods.
For more comprehensive understanding and current updates, it’s recommended to consult sources like the IRS’s official documentation or professional advisories on cafeteria plans (IRS.gov) (HSA for America) (Breeze) (IRS.gov) (Wagner Law Group).
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