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

Form of insurance that insurance companies buy for their own protection, "a sharing of insurance." An insurer (the reinsured) reduces its possible maximum loss on either an individual risk ...

Same as term Compulsory Insurance: coverage required by the laws of a particular state. For example, many states stipulate minimum amounts of automobile liability insurance that must be ...

Provision in a policy that states the circumstances under which an insurer may elect not to renew the policy. ...

Smallest premium necessary to keep the life insurance policy in force regardless of the current mortality, interest, and expense experience of the insurance company. This type of premium is ...

Situation in which insurance benefits exceed the actual loss of an insured. Overinsurance can be a problem for the insurer because it may tempt the insured to make a false claim in order to ...

Type of premium plan under which the employer (if noncontributory plan) or the employer and employee (if contributory plan) make level annual premium payments to fund the future retirement ...

Amount of required capital that the insurance company must maintain based on the inherent risks in the insurer's operations. These risks include asset depreciation risk, credit receivables ...

Written document containing instructions on managing one's assets during one's lifetime. The document may be revoked (unless made irrevocable at creation), terminated, or amended at any ...

Independent insurance salesperson who represents particular insurers but may also function as a broker by searching the entire insurance market to place an applicant's coverage to maximize ...

Popular Insurance Questions