Cafeteria Plans were introduced by the Revenue Act of 1978 and covered by the rules of the Internal Revenue Code Section 125. These were later amended by the Technical and Miscellaneous Revenue Act of 1988. What is a cafeteria plan? As its name suggests, a cateteria plan allows an employee to choose where his or her benefit dollars will be spent. A cafeteria plan pays for these benefits with pre-tax dollars which results in tax savings to both the employee and the employer. At the beginning of each year an employee makes an election, which is generally irrevokable as to the amount, if any he or she wants subtracted from their wages to cover the selected expenses. The cost of these non-taxable benefits are specifically excluded from an employee's gross income through this salary reduction plan. A cafeteria plan can include all or part of the following:

PREMIUM ONLY PLANS: used to pay employee's portion of any eligible health benefit premiums.

FLEXIBLE SPENDING ACCOUNT

• Health Flexible Spending Account: used to pay eligible health care expenses not covered by their health plan. Annual amount allowed determined by employer.
• Dependent Care Flexible Spending Account: allows an employee to be reimbursed on a pre-tax basis for child care or adult dependent care expenses that are necessary to allow the employee or their spouse to work, look for work or attend school full time. Limited to an annual maximum by law of $5,000 per year, $2,500 if married and filing a separate return.

SECTION 132 TRANSPORTATION EXPENSES (created by the Transportation Equity Act of the 21st Century) allows employees the opportunity to set aside a portion of their salary to pay for certain transportation limited to $100 per month pre-tax for mass transit and $195 per month for parking. Seperate reimbursement accounts are maintained for each catagory.

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IRS introduction to cafeteria plans www.irs.gov/pub/irs-utl/intro_to_cafeteria_plans_doc.pdf