Also known as Section 125 or Flexible Spending Accounts (FSA) is an IRS recognized program to facilitate employee payment of certain unreimbursed health care and dependant care expenses on a pre-tax basis.

Qualified expenses include covering premiums for employees and their dependents as well as qualified medical expenses not covered by insurance.  Dependent care can also be a qualified expense through a cafeteria plan.  For a full listing of qualified and non-qualified expenses you can go to www.irs.gov.

For the employer the benefits include payroll tax and worker’s compensation savings on pre-tax deductions.  It can also help with recruitment as a valuable addition to a benefits package.  For the employee there is a tax saving on amounts paid for qualified expenses.

There are also risks associated with a Cafeteria Plan. This is a “use it or lose it” plan.  Employees risk losing unreimbursed money at the end of the year. There is also a potential risk to the employer if medical expenses are reimbursed and an employee terminates prior to the full elected amount being deducted from their paycheck. Dependent daycare cannot be claimed for reimbursement until sufficient deductions have been taken, so no employer risk exists for this category.