From: Benefits
They are pretty much the same, and the two sets of terms are used interchangeably. A “cafeteria plan” (includes Premium Only Plans and Flexible Spending Accounts) is an employee benefits program designed to take advantage of Section 125 of the Internal Revenue Code. The cafeteria plan allows employees to pay certain qualified expenses (such as health insurance premiums) on a pre-tax basis, thereby reducing their total taxable income and increasing their spendable/take-home income. Funds set aside in Flexible Spending Accounts (FSAs) are not subject to federal, state, or Social Security taxes. You may establish a benefits program that provides for flex credits or cash in lieu of benefits under this program as long as you follow the IRS rules. Here is some more information about the typical components of Section 125/Cafeteria plans:
- Premium Only Plan (POP): Employers may deduct the employee’s portion of the company-sponsored insurance premium directly from the employee’s paycheck before taxes are deducted. A POP is the simplest type of Section 125 plan, and it requires low maintenance once it has been set up.
- Flexible Spending Accounts (FSA): In an FSA, employees may set aside on a pre-tax basis a pre-established amount of money per plan year. The employee can use the funds in the FSA to pay for eligible medical, dependent care, or transportation expenses. The plan year is one full year (365 days) and generally begins on the first of a month. Many employers design their flexible spending plan to run on the same plan year as their insurance program. Short plan years are allowed in certain instances.
- Cafeteria Plans are qualified, non-discriminatory benefit plans, meaning a discrimination test must be met based on the elections of the participants combined with any contribution by the employer. Here’s why: Section 125 of the Internal Revenue Code requires that Cafeteria Plans be offered on a nondiscriminatory basis. To ensure compliance, the Internal Revenue Code sets forth testing requirements to make certain that Cafeteria Plan benefits are available to all eligible employees under the same terms, and that the Plan does not favor highly compensated employees, officers, and owners. Exceptions include sole proprietors, partners in a company established as a partnership, and more-than-2% shareholders in an S-Corporation have special considerations concerning participation in a Cafeteria Plan.
