Section 125 Cafeteria plans or Flexible Spending Accounts (FSA) are becoming commonplace. With this plan, participants elect to deduct funds on a pre-tax basis from their paycheck for medical and dependent care expenses. Because payroll is reduced, employers benefit by saving FICA tax.
FSA funds are “use it or lose it”: if the participant does not use all the funds by the end of the plan year, s/he forfeits the balance. Because of the ‘use it or lose it’ provision, when a FSA is used in conjunction with an HRA plan, it is recommended that one provider administer both plans.