Section 125 Limits

These rules exclude all or part of the value of certain benefits from the recipient s pay.

Section 125 limits. These are the benefits you cannot include in your irs section 125 plan. However there is a limit on these contributions. This section discusses the exclusion rules that apply to fringe benefits.

Fringe benefit exclusion rules. In a section 125 plan or cafeteria plan employees can pay qualified medical dental or dependent care expenses on a pretax basis which has the effect of reducing their taxable income as well as their employer s social security fica liability federal income and unemployment taxes and state unemployment taxes where applicable. The limit is reduced to 2 500 for married employees filing separate returns.

It also includes participation rules annual limits and election procedures like what constitutes a qualifying event such as a spouse s job loss or a move. A section 125 plan document outlines specific details such as a description of the employee benefits that are covered through the plan and what they cost. The statutory 2 500 limit under 125 i applies only to salary reduction contributions under a health fsa and does not apply to certain employer non elective contributions sometimes called flex credits to any types of contributions or amounts available for.

What is a section 125 plan. These changes extend the claims period for health flexible spending arrangements fsas and dependent care assistance programs and allow taxpayers to make mid year changes. Section 125 plans must pass three nondiscrimination tests designed to determine if the plan discriminates in favor of highly compensated or key employees of the business.

The total dependent care benefits the employer paid to the employee or incurred on the employee s behalf including amounts from a section 125 plan should be reported in box 10 of form w 2. De minimis minimal benefits. Ir 2020 95 may 12 2020 washington the internal revenue service today released guidance to allow temporary changes to section 125 cafeteria plans.

Employees can only contribute up to 2 600 to an fsa or it is not considered a cafeteria plan. Coverage over the limit. The exclusion cannot be more than the earned income of either the employee or the employee s spouse.