Under a flexible spending plan, employees may purchase benefits with pre-tax dollars. Employees choose from a "menu" of benefit options offered by the plan. They are actually referred to as "cafeteria plans" by the IRS, but are also called Section 125 plans, as well as flexible spending plans.
Benefits that may be included in a Cafeteria Plan include medical coverage, eye care, dental coverage, group-term life (with a maximum death benefit of $50,000), disability insurance, and dependent care -- you may even be able to buy and sell vacation days.
Besides offering insurance options, many cafeteria plans offer participants the chance to utilize Flexible Spending Accounts (FSAs), a special kind of account funded by the employee on a pre-tax basis that provides for tax-free reimbursement of eligible expenses. FSAs may be set up to provide reimbursement for eligible medical expenses, dependent care expenses (child or elder care) or expenses related to adoption.
To obtain a list of eligible medical expenses, IRS Publication 502, call 1-800-TAX-FORM, or download a copy from the IRS website at www.irs.ustreas.gov.
With a flexible spending account, the employee elects a benefit amount, and begins funding the account with level pretax contributions -- $50 per month assuming a $600 election, $200 per month assuming a $2,400 election, etc.
The plan sponsor sets a maximum amount that the employee can contribute to a medical spending plan -- $1,000 to about $5,000 are typical. A dependent care reimbursement account, on the other hand, is subject to a federally imposed maximum of $5,000.