BASE® 125 Cafeteria Plan


Frequently Asked Questions about the BASE® 125 Cafeteria Plan.

Do employees need to utilize the employer's group health coverage to participate in the FSA?
Yes. According to the Affordable Care Act an employer must offer group health insurance to offer a general purpose FSA and the employees must have underlining group insurance coverage.

What medical expenses are eligible for the FSA?
The BASE® 125 Flexible Spending Account can be used to pay for medical expenses not paid for by insurance, usually deductibles, copayments, and coinsurance for the employee's health plan. A listing of legitimate expenses that can reimbursed for medical care can be found under Code § 213(d) that are not excluded by the plan documents. In order for an expense to be considered medical care under the tax laws, it must diagnose, cure, mitigate, treat or prevent disease, or affect a structure or function of the body.

Many people use IRS Publication No. 502 (“Medical and Dental Expenses”) to help guide them as to what expenses meet the Code requirements. But this publication should be used with caution, because it was meant only to help taxpayers figure out their income tax deductions – some statements are wrong when applied to health FSAs.

Can an employer self-administer an FSA?
Yes. However, there are many drawbacks to self-administering an FSA.

  • An employer who self-administers an FSA runs the risk of violating HIPAA requirements and limits, and even if the employer has under 50 employees it requires a co-worker to review personal health information.
  • The man power required would eliminate any savings, especially considering the additional workload placed on someone to track contributions, handle reimbursements, keeping up to date on eligibility of expenses, adjudicate claims, etc.
  • There is a lot of ongoing training and legal fees necessary to ensure the FSA stays in compliance and follows all rules and regulations established by the IRS, ERISA, etc. that come at an additional expense.
  • The employer would also need to complete the Highly Compensated and Key Employee testing required for a 125 Cafeteria Plan.

Can a participant be reimbursed for dental and vision expenses through the Limited Purpose FSA and an HSA?
No. Per the IRS, there is no double dipping allowed. Expenses reimbursed through a Limited Purpose FSA cannot be reimbursed under any other tax-advantaged reimbursement plan, which includes Health Savings Accounts.

What expenses are considered to be eligible dental and vision expenses?
The BASE® Limited Purpose FSA can be used to pay for dental and vision expenses not paid for by insurance or through another tax-advantaged medical reimbursement plan, usually dental and vision deductibles and co-pays, vision exams and screening tests, eyeglasses and contacts, dental x-rays, orthodontia work and more.

Does an employee need to utilize a Health Savings Account to participate in the Limited Purpose FSA?
No. An employee who does not participate in the Health Savings Account can participate in an FSA. The FSA can either be a medical (general purpose) FSA or Limited Purpose FSA.

Can I change my elections during the plan year?
No. The only time an employee can make a change to the amount elected during the plan year is if they have had a qualifying event during the plan year (e.g., marriage, divorce, or the birth of a child). These types of election changes must be made within 30 days of the event.

Is the DCAP a better choice for my client in comparison to the child tax credit?
The IRS allows a tax credit for dependent care or there is the option to utilize the DCAP. Participants cannot claim the same expenses for both the DCAP and Federal Income Tax Credit, so participants need to decide which is better. Generally, if an employee household income is greater than $26,000 per year, pre-taxing dependent day care benefits through the employer-sponsored plan will save the employee more than the child tax credit.

Can employees change elections during the plan year?
No. The only time an employee can make a change to the amount elected during the plan year is if they have had a qualifying event during the plan year (e.g., marriage, divorce, or the birth of a child). These types of election changes must be made within 30 days of the event.

Why is the limit on this benefit only $5,000?
The limit for any dependent care plan is federally capped at $5,000 per year. The IRS limits the amount you can put into the DCAP as follows:

  • $2,500 maximum contribution, if you are married and filing separately.
  • $5,000 maximum contribution, if you are married filing a joint return, or if you are a single parent.

Which dependents are eligible under the BASE® DCAP?

  • Children under age 13 in the participants custody whom are claimed as a dependent on their tax return.
  • A spouse who is incapable of self-care.
  • A dependent that lives with the participant, such as a child over age 13, parent, sibling, or in-law who is incapable of self-care, and who is claimed as a dependent on their tax return.
  • If care for a disabled spouse or dependent is provided outside the home, the dependent must live with the participant at least eight hours a day.

Why would an employer want to do a Premium Only Plan?
The employer deducts the employee’s share of insurance premiums from the employee’s paycheck before calculating applicable taxes. Therefore, paying premiums through a Premium Only Plan results in lower taxes and more take home pay for employees and FICA tax savings for employers.

What size of employer can use this type of plan?
Any size employer can take advantage of a Premium Only Plan.

Must all employees participate?
Employees who are currently contributing toward their health insurance benefit would participate, unless they opt out of the Plan.

What types of benefits can be offered under the BASE® Premium Only Plan?
This type of plan allows for employees to pay for a variety of employer-sponsored benefits, such as health, dental, and vision, ultimately reducing taxable compensation. When premiums for short term and long term disability are paid through a Premium Only Plan, the employee is taxed on the disability payments when they are received. Therefore, in most instances it is not advantageous for employees to pay short or long term disability premiums through the POP.

Is there minimum employee participation required?
No. An employer/company could have just one employee participate in a 125 Cafeteria Plan as long as the one employee is not the owner/shareholder or immediate family member.