Participation in "Cafeteria" Plans.

• Jurisdiction: United States
• Author: Cavanaugh, Thomas J.
• Date: 01 October 1994

A benefits alternative for some employees is to pay for a selection of benefits through a flexible benefits plan. These "cafeteria plans" are permitted under Section 125 of the Internal Revenue Code, which enables employers to create plans providing participants the ability to choose between cash wages and certain tax-free benefits. In the public sector, Section 125 plans have been used mainly to establish tax-free benefits that are financed entirely by employees through salary reduction.

Three types of benefits, or accounts, often are included in such public sector plans:

* Dependent Care Account (DCA): money set aside before taxes to pay for day care and other qualifying dependent care expenses that are incurred so as to permit the participant to work.

* Medical Expense Reimbursement Account (MRA): money set aside before taxes to pay for eligible medical care expenses not met through other benefits.

* Health Care Premium Conversion Account (PCA): the mechanism by which participant health care premiums for group coverage are paid on a before-tax basis.

In addition to the employee savings in federal (and possibly state and local) income taxes, both...