A cafeteria plan is a type of employee benefits program that allows employees to choose from a selection of pre-tax benefit options, similar to selecting items from a cafeteria’s menu. Under Section 125 of the Internal Revenue Code, cafeteria plans enable employees to allocate a portion of their salary toward specific benefits before taxes are deducted, reducing taxable income and increasing take-home pay.
Employees who participate in a cafeteria plan can select from a variety of benefits offered by their employer that suit their individual needs. Common options include health insurance premiums (medical, dental, and vision), flexible spending accounts (FSAs) for medical or dependent care expenses, health savings accounts (HSAs) for high-deductible health plan participants, dependent care assistance programs, and life and disability insurance. By contributing pre-tax dollars to these benefits, employees lower their taxable income, resulting in tax savings. Employers also benefit from reduced payroll taxes.
One key rule of cafeteria plans is that benefit elections are typically locked in for the plan year unless an employee experiences a mid-year life event, also known as a qualifying life event. These events allow employees to make changes to their benefits outside of the annual open enrollment period.
Common mid-year life events include changes in family status, such as marriage, divorce, legal separation, birth or adoption of a child, death of a spouse or dependent, or gaining or losing a dependent due to legal custody changes. Changes in employment status, including a transition between full-time and part-time work or a spouse’s change in employment status, may also qualify as a life event.
A change in residence that affects eligibility for current health benefits, such as moving to a new state, may allow for benefits adjustments. Dependent care changes, including switching daycare providers, significant changes in daycare costs, or a child aging out of eligibility, can also qualify as mid-year life events for dependent care FSAs. Additionally, gaining or losing other health coverage, such as through Medicare, Medicaid, or a new employer-sponsored plan, may warrant a mid-year benefits change.
Employees who experience a mid-year life event must submit the required documentation to document the event within the designated timeframe, typically 30 or 60 days, depending on the plan. Any changes made must be consistent with the life event, such as adding a newborn to a health plan after birth.
Understanding cafeteria plans and mid-year life events helps employees make informed benefits decisions while ensuring compliance with IRS and employer plan rules.
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