Section Cafeteria 125 Plans (POP) with Flexible Spending Accounts (FSAs) / Daycare Accounts (DCAP)
With a considerable portion of operating budgets going toward employee-related expenses, it seems logical to look for ways to control those costs. That is why businesses today view Human Resource cost containment as an important part of their business model. The IRS Section 125 Cafeteria Plan, also POP or FSA, offers a simple method of reducing employee costs as well as costs to the employer.
The difference between a POP and an FSA plan is that a POP allows only certain insurance premium to be deducted pretax whereas the FSA (and DCAP) plan allow for pretax deductions for qualified premium, medical expenses and most childcare care expenses.
An IRS Section 125 Cafeteria Plan is not related to any other benefit plan now in place. It does not affect or change coverage's under existing plans.
Flexible Spending Accounts (FSA)
FSA participants can pay for a wide range of out-of-pocket medical expenses with tax-free dollars. The list of eligible expenses is ever changing, so there is no all-inclusive list of eligible items. The IRS has provided a definition; it reads ‘if the purpose of your purchase has the purpose of preventing or alleviating pain, sickness or injury, then it is considered an eligible medical expense’. Examples include:
- All over-the-counter drugs
- Feminine Hygiene Products
- Medical Equipment
- Laser Eye Surgery
- Dental Work
- Eye Glasses
- Contact Lenses
We have compiled a list of eligible out-of-pocket medical expenses which is available from by clicking here or visiting the FSAStore.com.
For 2021, the IRS annual maximum contribution is $2,750.00.
FSA plans are subject to ‘use-it-or-lose-it’ rules but the IRS has minimized this risk by allowing for extended Runout Periods, Grace Periods and the newest $550 Carry Over provision.
Runout Period is set number of days after the plan ends where a participant can still submit claims incurred during the plan year;
Grace Period extends the plan year by 75 days allowing extra time to empty the account;
$550 Carry Over allows plan participants to Carry Over up to $550 of unused funds into the next plan year;
FSA plans are also subject to "uniform coverage rule" which requires 100% of the annual election to made available on day. For example, if a participant elects $1,200.00 as the annual contribution and in plan month two incurs $1,200.00 in eligible expenses, they will be reimbursed the full $1,200.00 election amount even though they have not yet contributed the full $1,200.00. The account balance will be $0 but the participant will still have the $100.00 per month deducted from their paycheck to reimburse the employer for the prepayment of the FSA contribution.
Dependent Care Account (DCAP)
Employees can use tax-free dollars to pay for Dependent Care expenses, which enables employees and their spouses to work, look for work, or attend school full time. The federal government has an annual limit of up to $5,000.00 per year to the Dependent Care Account (DCAP). DCAP expenses applies to children until they turn 13, but the account can also help pay for expenses related to a disabled spouse or care for an elderly parent or relative, as long as they are a tax dependent and deemed disabled.
Unlike the FSA plan, DCAP contributions must be made before participants can be reimbursed. For example, if a participant elects $200.00 per month ($2,400.00 annually) and submits a claim in month one for $300.00, they will only be reimbursed $200.00 in month one because the participant will not contribute the last $100.00 before next month and the DCAP account cannot be overdrawn like the FSA can.
With the use of the ABY Benefits sponsored mySourceCard, medical FSA participants no longer have to wait on their FSA funds to be reimbursed. Rather than having to fill out claims forms and waiting on manual checks, participants will receive preloaded debit cards giving them instant access to their funds at the point of service, eliminating the need for employees to pay cash for eligible expenses. Read more about this advanced service here!
Coordination with Health Reimbursement Arrangement (HRAs)
An employer may offer both an FSA and an HRA, but expenses cannot be reimbursed under both the HRA and the FSA. In the plan documents, employers specify which account will reimburse first; typically, the HRA pays first and the FSA second, but it is at the discretion of the employer. This is referred to as the "Benefit Order". FSAs and HRAs can also be structured so that specific types of items can only be reimbursed from one or the other, for example, permitting the FSA to cover only vision expenses and permitting the HRA to cover all other forms of medical expense.
Coordination with Health Savings Accounts (HSAs)
A Limited Purpose FSA (LFSA) is when an HSA is combined with an FSA plan. Under HSA rules, an FSA and HSA cannot be paired together unless FSA is restricted to dental and vision expenses only. These types of accounts can be very attractive for families who wear glasses or braces and also have high medical costs or simply want their HSA dollars to go unused and roll into future years.
The most important thing to remember when electing the LFSA is the use-it-or-lose-it rules associated with the FSA and to be very careful when electing both LFSA and HSA accounts to ensure minimum risk.