Kids and Health Care: Cafeteria Plans
MSAs are a variation on the more common, tax-advantaged cafeteria plans. The phrase "cafeteria plan" refers to the way in which you can spend proceeds from the account on specific needs that may arise, like choosing dishes in a cafeteria line. Some insurance professionals prefer the more technical descriptions "flexible-spending accounts" or "Section 125 plans" for the plans. (They're regulated by Section 125 of the Internal Revenue Code.)
Cafeteria plan money is placed into an escrow account. Whenever you have a medical cost that is not covered by your insurance, you submit a claim to the company that manages your employer's cafeteria plan, and that firm debits your account and sends you a check.
Any company can set up a cafeteria plan for its employees; this allows the employees to pay for a full menu of medical expenses with pre-tax dollars. This not only reduces taxable income for employees -- making the benefits virtually free -- it also reduces taxable payroll for the employer.
You can use the money from a cafeteria plan to pay for various deductible expenses. These can include:
- health insurance premiums;
- unreimbursed medical expenses (including copayments for doctor visits or prescription drugs);
- dependent care and child care expenses,
- alternative medical treatments (including acupuncture and chiropractic);
- treatment of alcoholism;
- programs to lose weight or quit smoking;
- vision care (eye doctor visits, glasses, contacts, etc.);
- birth control pills (which some health plans don't cover);
- dental fees, dentures and orthodontia;
- psychiatric care; and
- hearing aids.
If your employer offers a cafeteria plan, you choose the amount you would like to have withheld from each paycheck. If you typically spend $200 a month on child care and another $50 on prescription copayments, for example, you might elect to have $250 a month withheld from your paycheck. If you also have annual expenses for glasses, copayments for checkups, dental visits and so on, you can have an additional amount deducted each month to cover these costs, as well.
A cafeteria plan can be a very good way to save money on health care costs. However, the key is to avoid having too much money deducted from your paycheck. The money you put into a cafeteria plan each year must be used for health care costs. If there is money left over, it can't be rolled over into the account for the next year or returned to you. For all practical purposes, it's gone.
Cafeteria plans do tend to be somewhat complex and expensive to administer -- so, they usually make sense for larger employers.
