Cafeteria Plans - IRC Sec. 125
Premium Only Plan P.O.P. allows pretax deduction of payroll contributions for group medical and dental premiums. Since Life insurance proceeds are received tax free and in order to preserve the tax free status of disability plan distributions, life and disability premiums payroll contributions are typically not made using a P.O.P. Because contributions to a cafeteria plan result in a reduction of F.I.C.A. benefits, an annual open enrollment must be offered.
Health Care Flexible Spending Account F.S.A. allows a plan member to amortize anticipated qualified health care expenses on a tax deductible basis through payroll deduction. The employee must be prudent in the amount contributed. Once the amount is determined, it cannot be changed during the plan year without a change of status due to a change in marital status, the number of dependents, dependent eligibility, employment status or a change of residence. In other words, it is use-it-or-lose-it. Funds not used will be lost at the end of the plan year.
Dependent Care Flexible Spending Account is a third aspect of IRC Sec. 125 that extends tax deductibility to dependent day care expenses. For dependent care expenses to qualify:
- The dependent care must enable you or your spouse to be employed.
- The amount to be reimbursed cannot be greater than the spouse's income or one-half of the employees income who maintains the account.
- The dependent must be under age 13 and must be you're the account holder's dependent in accord with federal tax rules. Contributions must cease on the 13 th birthday.
- The care must be provided in the home or another location but not by a minor child or dependent for income tax purposes.
- If the services are provided by a day care facility that provides care for 6 or more children at the same time, the facility must comply with state and local day care regulations.
- Services must be for the physical care of the child not for education or meals.
- Care for a spouse or dependent who is incapable of self-care and regularly spends at least eight hours per day at home is also eligible.
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Tax Treatment – Fringe benefits extended to partners or 2% or more shareholders in an S Corp are considered partners for fringe benefit taxation purposes. The cost to provide the benefit to partners is treated as guaranteed payments . The cost of the benefits is treated as a tax-deductible compensation expense to the partnership or the S Corp. and reported as taxable compensation income to the partner or the 2% or more S Corp. owner In the case of a C Corp., fringe benefits can be provided tax-free to shareholder-employee and are tax deductible.
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