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Section 125 Cafeteria Plan Documents from PowerFlex.


Before an employer can take advantage of benefit tax deductions for insurance premiums, out-of-pocket medical expenses, dependent/adult daycare, and parking and transit expenses, the IRS and Department of Labor require employers to establish a formal Plan Document.

Plan Document Types:

HFSA - Healthcare Flexible Spending Account

A Healthcare Flexible Spending Account (FSA) is a reimbursement account that allows an employee to set aside money for healthcare costs from their paycheck before taxes are taken out. The advantage is that employees are spending pretax dollars, so they end up paying fewer taxes on their salary and having more to spend. With an FSA, employees can be reimbursed for dollars spent on eligible healthcare expenses that are not paid for by their health insurance plan.

If employees don't use the money by the end of the benefit plan year, their employer can't refund it to them. But the amount of money they risk forfeiting from their FSA at the end of the benefit plan year is small compared to the substantial savings-especially now that employees can spend FSA dollars on over-the-counter medicines that they use every day.

A Dependent Care FSA allows an employee to be reimbursed on a pre-tax basis for childcare or adult dependent care expenses for qualified dependents that are necessary to allow the employee or their spouse to work, look for work, or attend school full-time.

A Dependent Care FSA can be used to reimburse employees with pre-tax dollars if the expenses for dependents meet the IRS definition of dependent for income tax purposes. An adult (e.g., parent, grandparent, adult disabled child) may qualify as a dependent if the employee is providing more than half of that person's maintenance for the year.

Dependent care FSAs limit the annual maximum allotment by law to $5,000 per year, $2,500, if married filing a separate return. If an employee is currently receiving a childcare subsidy, they must ensure that the total amount they elect through the FSA combined with the total amount of the childcare subsidy they receive does not exceed the $5,000 limit. If married, the $5,000 limit must be observed by the employee and their spouse where both individuals have access to an FSA and/or a childcare subsidy.

POP - Premium Only/Premium Conversion Plan

Section 125 Premium Only Plans or POP allow employers to reduce payroll taxes by making one simple adjustment to the payroll process. Under a Section 125 Premium Only Plan employees elect to pay their portion of health insurance premiums on a pre-tax or tax-free basis rather than on an after-tax basis. This creates savings for both the employee and the employer.

ADOPT - Adoption Assistance Plan

By helping to defray the high cost of adopting a child, an adoption assistance plan gives an employer the opportunity to boost employee morale and help establish greater equality between the benefits provided to adoptive families and families with biological children. The federal tax code allows an exclusion from federal income taxes for employer payments and reimbursements of adoption expenses made under an adoption assistance plan -- but only if the plan and the benefits meet certain specific requirements. In addition, adoptive parents may qualify for a tax credit for their adoption expenses.

HRA - Health Reimbursement Arrangement

A Health Reimbursement Arrangement (HRA) is an instrument offered in conjunction with a high-deductible health plan, and is funded by the employer for each participating employee. It pays for eligible health care expenses typically covered under the medical plan. Unused funds can be carried over to the next year to cover future health care expenses, an incentive to employees to use their personal HRA wisely. If funds are exhausted, the employee is responsible for satisfying the remaining deductible before the plan begins to pay. If the employee changes jobs, the money stays with the employer.