Section 125 of the Internal Revenue Code has allowed the plan to establish the following spending accounts which allow employees to pay benefit-related expenses with pre-tax dollars:
- Premium Account
Contributions to the employer-sponsored benefit plans. If you must contribute to the cost of the employer-sponsored benefit plans such as the medical/dental plans, you can have this deduction taken on a pre-tax basis, automatically giving you more money in your paycheck.
- Health Care Flexible Spending Account (FSA)
Covers eligible health care expenses for you and your family that are not reimbursed by any medical, dental, or vision care plan that you or a dependent may have.
- Dependent Care Flexible Spending Account (FSA)
Covers eligible dependent care expenses incurred so you can work; if you are married, so you and your spouse can work; or so your spouse can attend school full time. Childcare, preschool, and before and after school care expenses fall into this category.
- Cash in Lieu of Benefits
Schools offering a cash incentive to employees eligible to opt out of the school’s insurance plan must use a Section 125 Plan. Employees do not contribute to this account; they need only to enroll in the plan. The school pays the cash incentive directly to the employee.
How it works:
Prior to the beginning of each plan year (the 12-month period beginning September 1), employees elect the amount of their salary they will contribute to each of the spending accounts (accounts 1-3 above). Throughout the year these amounts are contributed by means of pre-tax payroll deductions. As employees incur expenses eligible for reimbursement from the health care FSA or the dependent care FSA, they submit claims to the plan. The plan then reimburses the employees for these expenses. Since contributions by employees are not considered part of their gross incomes, these contributed monies are not subject to federal, social security, and in most cases, state and local income taxes. Thus the employees have increased their spendable income.
It should be noted that careful planning is a must when determining the amount to be contributed to each account. Federal law requires that all monies contributed to the spending accounts be spent on expenses incurred during the plan year; otherwise the contributed monies are forfeited. Commonly known as the use-it-or-lose-it rule, this rule represents the risk the employee takes by participating in the plan.
If you are interested in learning more, please give Todd Schilthuis a call at 877-274-8796, ext. 251 or email him at email@example.com.