Section 105 vs Cafeteria Plans

[Guest Jim D. Duncan]

Can anyone briefly explain to me these differences...i am not a rocket Scientist....so I need help !

Thanks.:confused:

[mroberts]

I believe you are truly trying to differentiate between a section 105 plan and a section 125 plan, not a cafeteria plan. The main difference is how the medical spending account is funded. Under a section 105 plan, the employer deposits funds into the account for employees to use. Under a section 125 plan, the employee has amounts deducted from his or her paycheck to fund the account.

If you are talking about a cafeteria plan, this usually encompasses all of an employer's benefits in which an allotment for benefits is given to each employee and the employee decides on how to spend the money. If the benefits elected happen to begreater than the allotment, then he or she has the difference deducted from future paychecks.

Hope this helps. Email me if you need more info since I could really type about 20 minutes on these two different plans.

[Kirk Maldonado]

mroberts:

Your distinction between a cafeteria plan and a Section 125 plan does not seem to be reflected in the terms of Section 125 of the Internal Revenue Code.

[GBurns]

A simple answer might not serve you well but a simplistic one might serve to put you in the right direction. However, you do need to do some research and reading to better understand.

In a nutshell Section 125 allows an employee relief from the constructive receipt rules of section 451. This relief is enjoyed by making a choice between cash (taxable) and certain qualified benefits (non taxable). The amount by which the employee elects to have his/her compensation reduced to pay for the selected qualified benefits are not included in the employees gross income, hence it is not taxed.

The employer might provide a selection of benefits from which the employee can choose, much like a menu, hence the term Cafeteria Plan. You select what you want from the menu and your salary reduction is used to pay for them.

These qualified benefits are group term life (section 79) medical benefits (section 105) dependent care (section 129) and a few other items.

Section 105 governs the benefits derived from accident or health plans whether ifully insured or self funded (self insured). Accident or health plans include medical or health arrangement, dental, vision, Disability (short term and long term), workers comp (to an extent) and medical reimbursement plans. In fact Treasury Regulation 1.105-5 is titled Accident or Health Plans and is where the definition of such plans comes from. Treas. Reg. 1.105-11 is titled Medical Reimbursement Plans and provides the rules for such plans except for FSAs that are under the Proposed Trea. Regs 1.125-2.

Section 125 does not govern benefits it provides relief from taxation of a part of your salary. Section 105 governs the taxation of benefits received from accident and health plans. A Cafeteria Plan provides a method of choosing what benefits to buy.