Cafeteria Plan
Categories: Accounting, Regulations, Econ
A way for elementary school kids to buy chicken nuggets and pizza. Also, a type of employee benefit.
Cafeteria plans allow an employee to contribute a portion of their pre-tax income to an account to be used for expenses like daycare or medical expenses. These can be known as an FSA (Flexible Spending Account), where money goes directly into an account the employee draws out of a needed, or a POP (Premium Only Plan), where the post-tax contributions are converted back into pre-tax amounts.
The idea behind this is that it allows the employee to lower their gross income, thereby lowering the amount they're taxed on, and it lets the employee save money faster by not paying taxes on it as it goes into the account.
The catch is that these funds have to go for those expenses only, so you can't decide to skip out on that dental work and go on vacation instead. We wouldn't blame you if you did (who wants dental work, it's expensive and it hurts) but this is ruled under IRS Section 125. Anything that has "IRS" in the title is not something you want to mess with, so best to just take the tax "break" and be happy about it.
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