Qualified benefits permitted in an IRC §125 plan include accident and health plans, group-term life insurance, health savings accounts (HSA), elective vacation days, elective contributions to a qualified cash or deferred arrangement (401(k) only), cash, and adoption assistance. Educational assistance plans are not permitted in an IRC §125 plan.
For more information, refer to Module 6, Lesson 1
All the following benefits can be offered in an IRC §125 plan EXCEPT:
- educational assistance. – Correct Answer
- group-term life insurance.
- elective vacation days.
- dependent care.
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Benefit selections are considered irrevocable although there are exceptions. Only benefits listed in §125 of the Internal Revenue Code can be included in a cafeteria plan and are not subject to income, social security, and Medicare taxes, with some exceptions. Only employees can participate in a §125 plan.
For more information, refer to Module 6, Lesson 1
Which of the following statements is true about §125 plans?
- Nonemployees can participate in §125 plans.
- Any benefit can be included in a cafeteria plan.
- Employees must make irrevocable benefit elections before the plan year begins. – Correct Answer
- 125 benefits are not subject to federal income taxation only.
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IRS rules allow Section 125 cafeteria plans and other flexible benefit plans providing qualified benefits to be funded with flex dollars or flex credits, salary reductions, or after-tax employee contributions.
For more information, refer to Module 6, Lesson 1
A cafeteria plan may be funded by any of the following EXCEPT:
- salary reduction.
- flex dollars or flex credits.
- after-tax employee contributions.
- benefit exchange dollars. – Correct Answer
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Net pay is calculated by subtracting all an employee’s deductions from the gross pay. However, if there is a negative deduction (such as a refund of a business expense), it must be added to the gross pay, not subtracted.
For more information, refer to Module 6, Lesson 1
An employee with a gross pay of $1,500.00 has the following deductions:
| Income, social security, and Medicare taxes | $326.75 |
| 401(k) contribution | $ 45.00 |
| Refunded business expense | $ 21.42 |
| Pretax health ins. premium | $116.25 |
Calculate the employee’s net pay.
- $990.58
- $1,012.00
- $1,033.42 – Correct Answer
- $1,149.67
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The concentration test for cafeteria plans determines if the nontaxable benefits given to key employees do not exceed 25% of such benefits given to all employees participating in the plan.
For more information, refer to Module 6, Lesson 1
Under the concentration test, a cafeteria plan is not discriminatory if benefits provided to key employees do not exceed:
- 10%.
- 25%. – Correct Answer
- 50%.
- 75%.
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Under IRS rules for §125 Cafeteria Plans, salary reduction elections can be changed during the plan year when there is a qualified change in status or cost. IRS rules require §125 plan benefits received in cash to be included in an employee’s income. Cafeteria plan rules require the loss of contributions at the end of the plan year when the employee has not incurred eligible expenses. The IRS Cafeteria Plan rules do not require employees working a specified number of hours each week to be eligible to participate in the cafeteria plan.
For more information, refer to Module 6, Lesson 1
Which of the following statements is true regarding §125 plans?
- Salary reduction elections can be changed during the plan year when there is a qualified change in status.
- At the end of the plan year, employees must be paid any remaining unreimbursed amount.
- Benefits received in cash are not taxed.
- Employees working ten hours a week or less must be included in the company’s §125 plan.
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While a cafeteria plan may offer employees the option of purchasing additional vacation leave with pre-tax dollars, the leave becomes taxable when taken and is subject to several restrictions related to the ban of deferred compensation including being carried over into the next plan year.
For more information, refer to Module 6, Lesson 1
IRC §125 generally prohibits the deferral of compensation from one plan year to the next. The exception to this rule includes all of the following benefits EXCEPT for:
- contributions to Health Savings Accounts (HSA).
- cash or deferred arrangements under IRC §401(k).
- purchased vacation days. – Correct Answer
- the carryover of up to $610 in a Medical FSA.
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Under §125 Cafeteria Plan rules, the employer must reimburse the $100.00 to the employee when $100.00 of qualified expenses incurred before the employee’s termination are substantiated.
For more information, refer to Module 6, Lesson 2
An employee had $300.00 deducted for a medical flexible spending account during the plan year. In November, the employee was terminated and $100.00 remained in the account. When must the employer reimburse the $100.00 to the employee?
- When $100.00 of qualified expenses are substantiated. – Correct Answer
- Within 30 days after termination.
- With the employee’s final paycheck.
- No later than December 31 of the current year.
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Under Section 125, medical coverage, 401(k) plans, long-term disability insurance and dependent care plans are eligible benefits. 403(b) and 457(b) plans are not eligible benefits in a cafeteria plan.
For more information, refer to Module 6, Lesson 1
All of the following qualified benefits can be offered under a Sec. 125 plan EXCEPT:
- deferred compensation to a 457(b) plan. – Correct Answer
- long-term disability insurance.
- medical coverage.
- dependent care.
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Under §125 Cafeteria Plan rules, the use of contributions to purchase eligible benefits is nontaxable.
For more information, refer to Module 6, Lesson 1
A company’s cafeteria plan allows for $350.00 in employer contributions per month for a choice of benefits. The $350.00 represents:
- nontaxable compensation if not chosen as a cash benefit. – Correct Answer
- taxable compensation for all federal taxes.
- taxable compensation for social security and Medicare taxes only.
- taxable compensation for federal income tax only.
