These cafeteria plans let employees pay certain work-related expenses with pre-tax dollars, which reduces taxable income and can increase take-home pay.
These employee benefit plans take their name from Section 125 of the IRS Code. With these plans, you deposit pre-tax dollars into a special account and use those funds to pay qualified expenses.
The funds in these accounts are exempt from federal and most payroll taxes, which can lower your overall tax burden.
You could save a substantial portion of the taxes you would otherwise pay on the money you contribute. It is a practical way to reduce taxable income and make budgeting for regular expenses easier.
You may choose from several types of these plans, including Premium Only Plans and Flexible Spending Accounts.
Plan types
- Premium Only Plan (POP) - Your employer deducts your health insurance premiums before deducting taxes from your paycheck.
- Flexible Spending Account (FSA) - You choose an amount of money you'll contribute to your FSA and then use the funds to pay eligible expenses.
Employers must generally offer these plans to all eligible employees and may not discriminate based on protected status, job title, pay rate, or seniority.
What Expenses do these plans Cover?
Depending on your specific plan, you may use it to pay expenses related to:
- Adoption expenses
- Dependent care
- Group term life insurance premiums
- Health savings account premiums
- Medical treatment
- Supplemental insurance such as accident, cancer, dental or vision insurance
- Transportation expenses
How to Enroll in these plans
Talk to your Human Resources department for details on enrollment. Many employers hold an open enrollment period for benefits each year, but your company's dates may vary.
For additional storefront and service information, see Section 125 Cafeteria Plans, Vehicle Operator Training & Workplace Safety.
How to Take Distributions From these plans
Submit requests for reimbursement to your HR department. For medical expenses, you typically do not have to wait until the end of the year to withdraw funds; as soon as you have a qualified expense you can request reimbursement.
Note that dependent care FSAs may follow different rules than medical FSAs. Unused funds in many FSAs are forfeited at the end of the plan year unless your employer offers a carryover or grace period.
These plans help you save for qualified expenses and give you extra cash in your paycheck. Consider reviewing your options during your employer's benefits enrollment period to decide what works best for your budget and needs.
Frequently Asked Questions
Who is eligible to participate?
Eligibility depends on your employer's plan rules, but most employers must offer coverage to all eligible employees without unlawful discrimination.
Can I change my contribution during the year?
Generally contributions are fixed for the plan year unless you have a qualifying life event such as marriage, birth, or a change in employment status.
Do unused FSA funds carry over to the next year?
Many FSAs forfeit unused funds at year-end, though some employers allow a small carryover or a short grace period; check your plan rules.
What happens to my account if I leave my employer?
Rules vary by plan; you may lose access to the account unless you elect continuation coverage where allowed, so confirm with HR before leaving.