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Section 125 – Cafeteria Plans: A Simplified Explanation

Section 125 – Cafeteria Plans: A Simplified Explanation

February 14, 20241 min read

Section 125 – Cafeteria Plans: A Simplified Explanation

Have you heard about Section 125 plans but found the details overwhelming? Let's break it down in simpler terms.

What is Section 125?

Section 125, also known as a cafeteria plan, is a program provided by employers. It allows employees to choose from different benefits, both taxable and non-taxable, which are deducted from their paychecks before taxes are calculated.

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Understanding the Notice

The notice discusses a change to the rule regarding deferred compensation under a Section 125 cafeteria plan. It introduces a grace period after each plan year. During this time, employees can use any unused benefits or contributions for qualified expenses incurred during the grace period.

Background Information

Normally, unused benefits or contributions at the end of a plan year are forfeited. However, this notice allows a grace period to utilize these remaining funds.

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How Does It Work?

Let's say your employer has a cafeteria plan year ending on December 31. If you have money left unused in your health FSA by December 31, you can use it for medical expenses incurred until March 15 of the following year. For example, if you have $200 left in your health FSA from 2023, you can use it for medical expenses until March 15, 2024.

Benefits of the Change

This change benefits employees by providing more flexibility in using their benefits. It prevents them from losing money left unused in their accounts at the end of the year.


Section 125 cafeteria plans offer employees valuable benefits while saving them money on taxes. With this recent modification, employees can now enjoy more flexibility in utilizing their benefits, ensuring that they make the most of what they've earned.

Section 125 – Cafeteria Plans: A Simplified Explanationsection 125 simplified
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