Furthermore, the exclusion of the cost of these benefits from employees' income can create a significant reduction in an employer's payroll taxes. A cafeteria plan is a written plan under which employees may choose among two or more benefits consisting of cash and qualified benefits. Qualified benefits excludable under specified IRC sections include group term life insurance coverage under IRC Sec. 79, medical expense benefits under IRC Sec. 105, accident and health plan coverage under IRC Sec. 106, and dependent care assistance benefits under IRC Sec.
Employers can make contributions to such plans under a salary reduction agreement with the employee.
Under a typical FSA arrangement, a participating employee may seek reimbursement for any medical expenses deductible under IRC Sec. 213 or any dependent care expenses eligible for the IRC Sec. The latter expenses are subject to the IRC Sec. Although medical care reimbursements are not subject to a statutory limit, the employer may impose a limit. Once an employee designates an amount for the FSA at the beginning of the year, any unused amounts in the account at the end of the plan year are forfeited.