Example Section 125 Salary Reduction Agreement

Editor`s Note: The Internal Revenue Service (IRS) 2020-29 release provides greater flexibility over the mid-year elections as part of a cafeteria plan under Section 125 of Calendar Year 2020, due to COVID-19. The notice applies to employer-sponsored health care, flexible health spending plans (FSA) and dependent assistance programs (DCAPs). A Flexible Expenditure Plan (FSA) is a form of cafeteria planning delivery, funded by salary reductions, that reimburses employees for expenses related to certain skilled benefits. An FSA may be offered to dependents, for adoption assistance and medical reimbursements. Benefits are subject to an annual cap and are subject to an annual rule of use or cowardice. The maximum amount of reimbursement, which is reasonably available for such coverage, must be less than 500% of the value of the coverage. In the case of an insured plan, the maximum amount reasonably available must be determined on the basis of the underlying coverage. An FSA cannot provide staff with a cumulative benefit beyond the planning year. For example, an employer with a cafeteria plan year that ends December 31, 2014 has an X employee who has chosen a $1,000 salary reduction for a health FSA for the year of the plan that ends on December 31, 2014. As of December 31, 2014, X used 200 $US in its health FSA.

X chose a salary reduction for a health FSA of 1,500 $US for the planned year that ended December 31, 2015. During the grace period [for the year 2014] from January 1 to March 15, 2014, x $300 of unpaid medical care is required. The unused $200 of the planning year, which ends December 31, 2014, will be used to pay or reimburse $200 of X`s $300 in medical expenses during the additional period. As a result, for the planning year, which ends December 31, 2014, as of March 16, 2015, there were no unused benefits or contributions. The remaining $100 in medical expenses incurred between January 1 and March 15, 2006 will be paid or reimbursed by x` Health FSA for the planning year ending December 31, 2015. On March 16, 2015, X still has $1,400 in the Health FSA for the planning year ending December 31, 2015. Salary reduction agreements are the basis of Section 125 “Cafeteria Plans,” which give the employee the choice between taxable income and a tax-free benefit.