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HR Magazine, January 2001: Kinder, Simpler Cafeteria Rules - Tax Qualified Plans Defined

By Carolyn Hirschman  1/1/2001
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HR Magazine,   July 2000 Vol. 46, No. 1

Tax Qualified Plans Defined

Cafeteria plans, created by the Revenue Act of 1978, are a type of tax-qualified flexible benefit plan that offers employees a choice between taxable benefits (such as cash and vacation pay) and at least two nontaxable benefits (such as health, disability and term-life insurance). Such plans are popular because they allow employers to give employees a choice of benefits as well as the ability to pay for some benefits on a pretax basis and—as a result—to reduce their taxable income.

The three types of tax-qualified plans allowed under Section 125 of the Internal Revenue Code are:

  • Premium conversion plans. Employees make benefit contributions with pretax dollars; the plans may exist separately or within a cafeteria plan.

  • Flexible spending accounts (FSAs). Employees pay for unreimbursed medical expenses and/or dependent care on a pretax basis; unspent funds are forfeited; the plan may exist separately or within a cafeteria plan.

  • Cafeteria plans. Employees choose from among two or more benefits consisting of cash and nontaxable benefits; unused benefits are forfeited.
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