Cafeteria plan
A cafeteria plan is a type of employee benefit
Employee benefit
Employee benefits and benefits in kind are various non-wage compensations provided to employees in addition to their normal wages or salaries...

 plan offered in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

 pursuant to Section 125 of the Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...

. Its name comes from the earliest such plans that allowed employees to choose between different types of benefits, similar to the ability of a customer to choose among available items in a cafeteria
A cafeteria is a type of food service location in which there is little or no waiting staff table service, whether a restaurant or within an institution such as a large office building or school; a school dining location is also referred to as a dining hall or canteen...



In May 2005 the Treasury Department and the Internal Revenue Service announced that, effective immediately, employers are permitted to design cafeteria plans that enable participants to be reimbursed for claims incurred up to 2½ months after the close of a plan year. Prior to this notice, reimbursements were permitted only for claims incurred during the plan year. Under the new ruling, an employee who participates in an Flexible Spending Account (FSA) plan ending December 31 can still receive reimbursement for claims incurred through March 15 if the extended grace period is adopted by the employer.

Since the “use it or lose it” fear of many employees was reduced significantly by the expanded claims reimbursement cycle and access to funds can now be better targeted for purchases that the employee actually needs, there has been a clear increase in both the percentage of employees opting to participate in a Flex Plan and in the level of annual elections, enhancing FICA savings for employees and employers alike.

Features and benefits

Employees of employers with cafeteria plans may obtain such benefits as health insurance, group-term life insurance, and flexible spending account
Flexible spending account
A flexible spending account , also known as a flexible spending arrangement, is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer in the United States...

s through the plan. Though some cafeteria plans offer an explicit choice of cash or benefits, most today are operated through a "salary redirection agreement", which is a payroll deduction in all but name. Deductions under such agreements are often called pre-tax deductions. Salary redirection contributions are not actually or constructively received by the participant. Therefore, those contributions are not generally considered wages for federal income tax purposes, nor are they usually subject to Federal Insurance Contributions Act tax
Federal Insurance Contributions Act tax
Federal Insurance Contributions Act tax is a United States payroll tax imposed by the federal government on both employees and employers to fund Social Security and Medicare —federal programs that provide benefits for retirees, the disabled, and children of deceased workers...

 (FICA) and Federal Unemployment Tax Act
Federal Unemployment Tax Act
The Federal Unemployment Tax Act is a United States federal law that imposes a federal employer tax used to help fund state workforce agencies. Employers report this tax by filing an annual Form 940 with the Internal Revenue Service...


Reasons for implementing a Section 125 plan are primarily for the tax savings advantages for the employer and employee. Both parties save on taxes and therefore increase their spendable income. Employees' pretax contributions are not subject to federal, state, or social security taxes. Employers save on the employer portion of FICA, FUTA, and workers' compensation insurance premiums.

A cafeteria plan may permit an employee to revoke an election during a period of coverage and to make a new election only in limited circumstances, such as a change in status event. A change in status event includes changes in the number of an employee's dependents.

Medical expenses eligible for reimbursement under a Section 125 cafeteria plan

  • Acupuncture
  • Adoption related medical costs
  • Air conditioner filters for allergy relief
  • Alcoholism treatment
  • Ambulance services
  • Attendant for blind or deaf student
  • Autoette
  • Birth control pills
  • Blind persons accessories (seeing eye dog, Braille training, special schooling)
  • Capital expenditures (home modifications for handicapped)
  • Car modifications for handicapped
  • Childbirth prep classes (mother only)
  • Chiropractors
  • Christian Science treatment
  • Contact lenses (including replacement insurance)
  • Cosmetic Surgery (non-elective only)
  • Crutches
  • Deaf persons accessories (hearing aids, special schooling)
  • Dental fees
  • Dentures
  • Diagnostic fees
  • Doctors’ fees
  • Domestic aid (in home nurse)
  • Drug addiction treatment
  • Dyslexia language training
  • Electrolysis (medical reasons only)
  • Elevator for cardiac conditions
  • Eye exams and glasses
  • Fertility enhancement
  • Fluoride device
  • Guide animals
  • Hair transplant (surgical and medical reasons)
  • Hearing aids
  • HMO’s
  • Hospital care (in-patient)
  • Indian medicine man
  • Insulin
  • Insurance premiums (medical post-tax only)
  • Iron lung
  • Lab fees
  • Laetrile (legal use)
  • Laser eye surgery
  • Lead paint removal
  • Learning disability (doctor recommended special schooling fees)
  • Legal expenses related to medical condition
  • Lifetime medical care prepaid-retirement home
  • Limbs (artificial)
  • Lodging (for medical care away from home)
  • Long Term Care Contracts (qualified medical only)
  • Long Term Care Services (qualified medical only)
  • Meals (medical care away from home)
  • Medical conferences (relating to illness)
  • Nursing home (medical reasons)
  • Nursing services (home care)
  • Operation (legal, including abortion)
  • Organ Donor
  • Orthodontia
  • Orthopedic shoes
  • Osteopaths
  • Oxygen equipment
  • Prescription Drugs -(See note below)
  • Psychiatric care
  • Psychotherapists
  • Sexual dysfunction treatment
  • Sterilization
  • Stop Smoking Programs (and related stop smoking prescription drugs only)
  • Swimming pool (for polio or arthritis treatment)
  • Telephone equipment (for hearing impaired)
  • Television close caption prescribed by doctor
  • Vasectomy
  • Weight loss programs (doctor prescribed for medical reasons)
  • Wheelchair
  • Wigs (alleviation of physical or mental discomfort)
  • X-rays

Note: Pursuant to Revenue Ruling 2003-102, over-the-counter drugs that are used to alleviate or treat personal injuries or sickness are now reimbursable through health care flexible spending accounts. The following is a list of common non-prescription over-the-counter items eligible for reimbursement, dual purpose items that may be reimbursable with a physician’s statement and items that are not reimbursable.

This list does not include all reimbursable items but is the best guidance provided by the Internal Revenue Service to date.

Eligible expenses

The following is a list of over-the-counter items the IRS has determined to be primarily for medical care and eligible for reimbursement, however over-the-counter (OTC) medicines require a prescription.
  • Allergy medicine
  • Antacids
  • Bactine
  • Band-Aids/bandages
  • Anti-diarrhea medicine
  • Bug-bite medication
  • Calamine lotion
  • Carpal-tunnel wrist supports
  • Cold medicines
  • Reading glasses
  • Cold/hot packs for injuries
  • Condoms
  • Contact lens cleaning solution
  • Cough drops
  • Spermicidal foam
  • Diaper rash ointments
  • First aid cream/First aid kits
  • Hemorrhoid medication
  • Incontinence supplies
  • Laxatives
  • Liquid adhesive for small cuts
  • Menstrual cycle products for pain/cramps
  • Motion sickness pills
  • Muscle or joint pain products
  • Nasal sinus sprays/strips
  • Nicotine gum/patches for stop-smoking
  • Pain relievers
  • Pedialyte for ill child dehydration
  • Pregnancy test kits
  • Rubbing alcohol
  • Sinus medications
  • Sleeping aids to treat insomnia
  • Sunburn ointments or creams
  • Thermometers (ear or mouth)
  • Throat lozenges
  • Visine and other eye products
  • Wart remover treatments

Dual purposes items

The following list of dual-purpose over-the-counter items can be reimbursed if used for medical
purposes. They must be accompanied by a medical practitioner's note stating the item is to treat a
specific medical condition and not a cosmetic procedure.
  • Acne treatment (Retin A) only to treat a specific medical condition such as acne vulgaris
  • Dietary supplements or herbal medicines to treat medical conditions in narrow circumstances
  • Fiber supplements under narrow circumstances
  • Glucosamine/chondrotin for arthritis or other medical conditions
  • Orthopedic shoes and inserts (only the cost difference between orthopedic and nonorthopedic

shoes will be reimbursed)
  • Hormone therapy and treatment for menopause symptoms such as hot flashes and night

  • Pills for lactose intolerance
  • Prenatal vitamins
  • St. John’s Wort for depression
  • Sunscreen
  • Weight-loss drugs to treat a specific disease including obesity
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