| Many employers offer a
cafeteria plan to their employees. This type of plan, also called a flexible benefit plan,
allows employees to choose between cash or a menu of qualified benefits such as accident
and health coverage, group-term life insurance coverage, and/or dependent care benefits.
The plan may also allow employees to pay for these expenses with pre-tax salary or wages. Some plans allow employees to choose a combination of the
two options. If the cash option is chosen, the cash is taxable. However, medical expenses
paid for with plan money may be deducted on Schedule A, and a credit may be claimed for
the child care expenses. Some special considerations regarding the pre-tax option are
shown below.
Benefits of the pre-tax option: Amounts set aside
are not subject to federal income tax and often are not subject to state income tax, as
well. Amounts set aside are not subject to FICA or Medicare taxes. Because the amount you
set aside is pre-tax, the actual reduction in your paycheck will be less than the amount
set aside. For example, a $200 set-aside may reduce your paycheck by only $150 because a
smaller amount of taxes is withheld.
Taxpayers who cannot take a medical deduction on
Schedule A receive a tax benefit for medical expenses.
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