Texas General Lines — Life, Accident, Health and HMOHealth InsuranceHard
Which of the following is considered a 'cafeteria plan' under IRS Section 125, allowing employees to choose from a menu of benefits with pre-tax dollars?
- AFlexible Spending Account (FSA)
- BHealth Reimbursement Arrangement (HRA)
- CHealth Savings Account (HSA)
- DMedical Expense Insurance
Show answer & explanationAnswer & explanation
Correct answer: A. Flexible Spending Account (FSA)
Flexible Spending Accounts (FSAs) are a type of cafeteria plan (Section 125) that allow employees to set aside pre-tax money from their paycheck to pay for certain out-of-pocket health care costs and dependent care. HRAs and HSAs are also tax-advantaged but have different structures and eligibility requirements.
Why the other options are wrong
- B. HRAs are employer-funded accounts, not typically funded by employee pre-tax contributions through a cafeteria plan.
- C. HSAs require enrollment in a High Deductible Health Plan (HDHP) and can be funded by both employer and employee, but are not themselves a cafeteria plan; they can be offered *through* a cafeteria plan.
- D. Medical Expense Insurance is the health insurance policy itself, not a flexible spending account or cafeteria plan.
Flexible Spending Account (FSA)
An employer-sponsored plan that allows employees to set aside pre-tax money to pay for qualified out-of-pocket medical or dependent care expenses.
- Funds are 'use it or lose it' (some carryover allowed by IRS rules)
- Established under IRS Section 125 (cafeteria plan)
- Cannot be combined with an HSA for the same medical expenses
Memory trick: FSAs are 'Flexible' with 'Spending' 'Accounts' for 'Pre-Tax' care.