Section 125 Plans (cafeteria Plans)

Definition of "Section 125 plans (cafeteria plans)"

Shon McGuire real estate agent

Written by

Shon McGuireelite badge icon

Adams Cameron & Co. Realtors

Additions made by Congress in 1978 to the Internal Revenue Code that provide an employee benefit plan under which the employee makes an irrevocable decision to forego a portion of future income in exchange for receiving future benefits not subject to income tax at reception date. The employer deducts the cost of the employee's future benefits from present income as a business expense. These plans usually provide three options:

  1. Premium Conversion Employee contributes a proportionate share of the family health care costs with pre-tax dollars.
  2. Medical Reimbursement Account Employee is able to use a SALARY REDUCTION PLAN to pay with dollars on a pre-tax basis for medical expenses not covered by insurance; a separate medical reimbursement account is established for each employee.
  3. Dependent Care Reimbursement Account Employee is able to use a salary reduction plan to pay with dollars on a pre-tax basis for dependent care expenses.
An additional option sometimes provided for employees only (family members are excluded) is TERM LIFE INSURANCE for an amount up to $50,000 and DISABILITY INCOME INSURANCE. All employees must have equal access to the plans whether they are highly compensated or non highly compensated employees. Any monies left in the employee's account not used by the end of the year revert back to the company; this is known as the Use It or Lose It rule. As the employee incurs expenses, that employee applies for reimbursement through a form attached to the bill. When the administrator of the plan issues a check to the employee for the expenses, a statement is also provided that shows the amount remaining in the employee's account.

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Insurance Terms

Present value of future benefits. This type of reserve would be applicable for single premium life insurance, paid-up insurance, single premium annuity, and a paid-up annuity. ...

Amount, not in excess of $10,000 per year, given to each of an unlimited number of donees free of federal estate tax and gift tax. Each individual can give up to $10,000 to any one donee, ...

In many health insurance and dental insurance policies, stipulation that, if the estimated cost of a recommended plan of treatment exceeds a specified sum, the insured must submit the plan ...

Type of hold-harmless agreement made by a property owner as a condition for being served by a railroad spur. If the owner wants a special sidetrack, the railroad requires the owner to ...

Dividend paid to policy-holder according to the time period in which the policy was sold and the investment return the insurance company made on that policy during that time period. ...

In property insurance policy, clause that stipulates that if legislative acts or acts of the insurance commissioner's office expand the coverage of an insurance policy or endorsement forms ...

Coverage for motorized vehicles, each of which requires separate policies for property damage and liability exposures. Motorized vehicles are not covered under a homeowners insurance policy ...

Coverage to indemnify an owner for whom work was done if the completed work is not free of worker's liens for labor and material. ...

Pension plan that allows an employee to contribute by electing to have money deducted from each paycheck. Some qualified plans such as 401 (k) allow employees to contribute pre-tax dollars, ...

Popular Insurance Questions