Some employers offer cafeteria plans, more formally known as flexible spending plans, which give you the option of participating in a range of tax-saving benefit programs.
If you enroll in the plan, you choose the percentage of your pretax income to be withheld from your paycheck, up to the limit the plan allows. You allocate your money to the parts of the plan you want to participate in.
For example, you can set aside money to pay for medical expenses that aren't covered by insurance, for child care, or for additional life insurance coverage. As you incur these kinds of expenses, you are reimbursed from the amount you have put into the plan.
Since you owe no income tax on the money you contribute, you actually have more cash available for these expenses than if you were spending after-tax dollars.
However, you must estimate the amount you're going to contribute before the tax year begins, and you forfeit any money you've set aside but don't spend. For example, if you've set aside $1,500 for medical expenses but spend only $1,400, you lose the $100.
In some plans the deadline for spending the money in your flexible spending account is December 31. Other plans provide up to a three-month expension.
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- After-tax income, Flexible spending account, Hardship withdrawal, Health savings account (HSA), High deductible health plan (HDHP), Pretax contribution, Pretax income, Withholding
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