What is a Section 125 "Cafeteria" Plan?

A Section 125 Cafeteria Plan is an employer-sponsored benefits plan that lets employees pay for certain qualified medical expenses on a pre-tax basis.  The funds can be used for any number of options, but it is important to note that a Section 125 Cafeteria Plan is not health insurance in and of itself. It provides employees choice regarding the use of pre-tax dollars for the purchase of healthcare options, such as medical, dental or vision plans.   

The most common Section 125 Cafeteria Plans are:

  • Flexible Spending Accounts (FSAs)      An FSA allows employees to pay for qualified out-of-pocket medical expenses on a pre-tax basis. 
  • Health Spending Accounts (HSAs)       The major difference between an HSA and an FSA is portability.  With HSAs, the account is considered "owned" by the employee, and it can be taken with them on a post-employment basis.
  • Dependent Care Assistance Plans (DCAP)    These are FSAs that allow employees to set aside up to $5,000 on a pre-tax basis to pay for dependent care services. 

Depending on the Plans, there will be differences in each regarding coverage, portability, "use it or lose it" rollover consequences and employment status issues.  The potential tax benefits to both the employer and employee, however, make these alternatives attractive and beneficial all the way around.