GENERAL FLEXIBLE SPENDING ACCOUNT RULES
The following will provide with the “general rules” governing flexible spending accounts under a Flexible Benefit Plan
(also referred to as a Cafeteria or §125 Plan). Please refer to the Summary Plan Description for complete details and a
description of benefits.
WHAT IS A CAFETERIA OR SECTION 125 PLAN?
This is an employee benefit that permits employees (self-employed individuals are not eligible to participate) to pay for their
portion of various health care costs, including insurance premiums for accident and health policies and other out-of-pocket
medical expenses not otherwise covered by insurance, as well as dependent care under designated flexible spending
accounts called FSAs. A Medical FSA or Dependent Care FSA allows employees to defer money out of each paycheck on
a PRE-TAX basis. This means that no federal, state, or FICA taxes are taken out of this money. The benefits under a
Cafeteria plan are one of the most valuable benefits an employer can offer since it allows employees to “pick and choose”
the specific level of coverage and the type of coverage to fit their individual needs on a pre-tax basis.
The money is then credited to your designated FSA and is available to use when you incur out-of-pocket expenses eligible
for reimbursement under that account. Different types of accounts must be segregated and cannot be comingled. Each type
of account has certain rules that apply as summarized below. Expenses eligible for reimbursement are always limited to
those expenses incurred during the plan year while a participant. A cafeteria plan cannot provide for any form of deferred
compensation or life insurance except for eligible group term insurance. Any group term amount in excess of $50,000 must
be included as taxable income to the employee. Account balances cannot be carried over from year to year. They must be
used solely for expenses for the plan year and claims must be filed within the time permitted—generally within 90 days
following the close of each plan year.
HOW DOES A CAFETERIA PLAN SAVE EMPLOYEES MONEY?
Let’s say you typically spend $1,000 per year in out-of-pocket expenses for Rx copays, office visits copays, plan deductibles
and for expenses not covered by your medical or dental plans, including certain over-the-counter drugs (assuming your
Cafeteria Plan permits reimbursement for over-the-counter medications meeting the IRS guidelines, such as flu and cold
medicine and other medicines for specific illnesses or injuries.
Here are the 2007 tax tables:
FICA Taxes 7.65% On the 1st $970500 + 1.45% of all excess
Federal Taxes 0% - 28%
GA State Taxes 1% - 6%
The 2007 Federal tax rate is as follows:
Single Return Married Return Rate
$0-$7,650 $0-$15,650 10%
$7,650-$31,850 $15,650-$63,700 15%
$31,850-$64,249 $63,700-$128,500 25%
$64,250-$97,925 $128,500-$195,849 28%
$97,925 - $174,849 $195850 - $349699 33%
$174,850+ $349,700 + 35%
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What you must earn to take home (net) $1,000???
If your Combined Tax Rate is: You must have a Gross Income of: Your effective Tax Savings are:
7.65% (0% Fed/0% State) $1,082.84 $82.84
28.65% (15% Fed/6% State) $1,401.54 $401.54
38.65% (25% Fed/6% State) $1,629.99 $629.99
41.65% (28% Fed/6% State) $1,713.80 $713.80
If you are in the 28% bracket, you must pay minimum taxes (assuming no state taxes) of 41.65%. This means you only get
to keep 58.35% of your earnings! Therefore, you must earn $1,713.80 to “net” $1,000. If you run make deferrals to a
Flexible Benefits plan to pay those medical expenses, you SAVE $713.80. This is a significant savings for anyone! When
you are reimbursed for these expenses out of an FSA account, you avoid paying FICA taxes (social security and Medicare),
Federal Taxes and State Taxes (if any).
MEDICAL REIMBURSEMENT ACCOUNT (MRA) RULES
1. The coverage amount you elect as a participant will be credited to a medical reimbursement account for the year on the
books of the Company and you will be reimbursed, up to the annualized amount that would be available in that account
less prior reimbursements, for qualifying medical care expenses incurred during the year for any member of your
immediate family (spouse, dependent children, dependent parents).
2. Reimbursement will be available for “qualifying medical care expenses,” only as described on the reverse side of this
form. Insurance premiums may not be reimbursed under an MRA. (See OPRA). You must notify the Company if you
have reason to believe that any medical care expense for which you have obtained reimbursement is not a qualifying
expense. You agree, per plan rules, to indemnify and reimburse the Company for any liability the Company may incur
for failure to withhold federal and state income tax or Social Security tax from any reimbursement you receive for a
non-qualifying expense, up to the amount of additional tax actually owed by them.
3. Salary reduction elections cannot be changed or revoked at any time during the calendar year, except for a Change in
Family Status or Special Enrollment, as permitted under the plan. Changes will not be effective retroactively. Changes
will be effective as the beginning of the month following submission of the change. Participants are not permitted to
reduce/terminate a medical FSA election except in the event of death of a spouse or dependent, change in legal
marital status, or change in employment that causes them to be ineligible to participate in the plan. Elections
cannot be reduced to an amount less than what has already been reimbursed to the participant.
4. The reduction in cash compensation is in addition to any reductions under other agreements or benefits plans and is
subject to the terms of the Flexible Benefits Plan and Medical Reimbursement Plan, as from time to time in effect, shall
be governed by and construed in accordance with the laws of the state in which you are employed, shall take effect as a
sealed instrument under such state laws and revokes any prior election and compensation reduction agreement relating
to the Medical Reimbursement Plan.
5. If actual out-of-pocket expenses for the year are less than the amount you contributed for the year the excess funds must
be forfeited under IRS rules and be reallocated equally to participants in that FSA the following year under a “use it or
lose it rule.” It is rare for you to actually end up worse off than you would have been had all the medical expenses been
paid on an after-tax basis. This is not hard to understand when you consider that most employees pay over 40% of their
hard earned dollars on taxes.
6. If you terminate employment, benefits may be continued under COBRA rules if the amount available for benefits
exceeds the COBRA premiums for the remainder of the year AND your company is subject to COBRA rules. If you do
not continue your benefits under COBRA, you may continue to submit claims for expenses incurred during the plan
year up to the amount deferred and credited to your account at time of termination less any reimbursements.
7. Grace Period to Close out your Account: Claims to be incurred 2 ½ months following the close of the plan year and
those claims can be submitted for reimbursement up to 120 days after the close of the plan year, allowing employees
extra time to use the otherwise forfeited money in their FSA accounts. Example: If your plan were on a calendar
year, the final submission date for 2007 claims would be April 30, 2008 and claims incurred from January 1,
2008 through March 15, 2008 could be applied against your 2007 FSA balance if you have a balance remaining
as of 12/31/2007.
All claims along with substantiation of the expense, any insurance payment, must be submitted to:
The Cherokee Benefits Group, Inc.
416 Creekstone Ridge
Woodstock, GA 30188
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QUALIFYING MEDICAL CARE EXPENSES
Under the MRA, you may be reimbursed only for those types of medical expenses normally deductible on your federal
income tax return (without regard to the 7.5% of the adjusted gross income limitation). All health care expenses reimbursed
through this Plan cannot be claimed as a deduction for income tax purposes. Double-dipping is not permitted (receiving
reimbursement for the same service or product from two different sources). Under the MRA, an employee will be
reimbursed for those types of medical expenses normally deductible on their federal income tax return. Also listed are some
expenses that are expressly ineligible for reimbursement pursuant to federal law. This list does not include every expense
that is or is not reimbursable. If you have any questions regarding the eligibility of any expense for reimbursement, please
contact your Plan Administrator. In addition, reimbursement is subject to the “reasonableness” of the amount of the
expense. The following lists examples of expenses that are eligible for reimbursement under the MRA.
Prescription drugs filled by a licensed pharmacist
Insulin and syringes
Birth control drugs prescribed by doctor and available only by prescription
Expenses specifically disallowed:
Drugs that are illegal under Federal Law (regardless of State Law)
Drugs that do not require a prescription for their use (even if prescribed by a doctor)
Vitamins, supplements or herbs not dispensed by a licensed pharmacist unless prescribed by a medical provider
(documentation would be required)
OVER-THE-COUNTER DRUGS (If covered by your plan, are limited to a 90 day supply)
Expenses specifically disallowed:
Vitamins unless prescribed by a medical provider (documentation would be required) including pre-natal vitamins.
Anything merely beneficial to the general good health and well-being.
MEDICAL EQUIPMENT (as prescribed by medical provider due to a specific injury or illness – documentation from
medical provider required.)
Wheelchair or autoette
Crutches (purchased or rented)
Special mattress and plywood boards prescribed to alleviate arthritis
Oxygen equipment and oxygen used to relieve breathing problems that result from a medical condition
Support hose (if medically necessary)
Wigs (when medically necessary to mental health of individuals who lose their hair because of disease)
Excess cost of orthopedic shoes over cost of ordinary shoes
Expenses specifically disallowed:
Vacuum cleaner, furnace filters or special bedding purchased by an individual with dust allergy
Exercise equipment not related to a specific medical condition
Services of psychotherapists, psychiatrists and psychologists
Psychiatric therapy for sexual problems
Legal fees directly related to commitment of mentally ill person
Expenses specifically disallowed:
Psychoanalysis undertaken to satisfy curriculum requirements of a student
Routine and preventive physicals
School and work physicals
C-4 General Cafeteria Plan Rules Page 3 of 7
FEES / SERVICES
Physician's and Hospital fees
Nursing services for a specific medical ailment
Cost of a nurse's room and board if paid by the taxpayer when nurse's services qualify
The Social Security tax paid with respect to wages of a nurse when nurse's services qualify
Surgical or diagnostic services
Cosmetic surgery that treats a deformity caused by an accident or trauma, disease, or an abnormality at birth
Services of chiropractors and osteopaths
Fees for anesthesiologists, dermatologists and gynecologists
Christian Science practitioner fees
Expenses specifically disallowed:
Cosmetic surgery or procedure that improves the patient's appearance but does not meaningfully promote the proper
function of the body or prevent or treat an illness or disease
Payments to domestic help, companion, baby sitter, chauffeur, etc. who primarily renders services of a non-medical
nature (this may be reimbursable through a Dependent Care FSA)
Nursemaids or practical nurses that render general care for healthy infants (this may be reimbursable through a
Dependent Care FSA)
Fees for exercise, athletic or health club memberships when there is no specific health reason for needing membership
Marriage counseling provided by clergyman
Optometrist or ophthalmologist's fees
Eyeglasses and Contact lenses
Contact lens supplies and solution
TREATMENTS & THERAPIES
Treatment for chemical dependency
Physical therapy received as rehabilitative medical treatment
Expenses specifically disallowed:
Tattoos and ear piercing
Treatment for varicose veins
Physical treatments unrelated to a specific health problem (e.g., massage for general well being)
Weight loss programs not related to a specific health problem or illness
Any illegal treatment
ASSISTANCE FOR THE HANDICAPPED
Cost of guide for a blind person
Cost of note-taker for a deaf child in school
Cost of Braille books and magazines in excess of cost of regular editions
Seeing eye dog (including cost of buying, training and maintaining)
Hearing-trained cat or other animal to assist deaf person (including cost of buying, training and maintaining)
Household visual alert system for deaf person
Excess costs of specifically equipping automobile for handicapped person over the cost of an ordinary automobile;
device for lifting handicapped person into automobile
Special devices such as tape recorder and typewriter, for a blind person.
Batteries for operation of hearing aids
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DENTAL & ORTHODONTIC CARE
Dental care including x-rays, fillings, extractions, dentures, etc.
Cost of fluoridation of home water supply advised by dentist
Braces or other orthodontic devices
Expenses specifically disallowed:
Teeth bleaching or whitening
Expenses of services connected with donating an organ
Cost of computer storage of medical records
Cost of special diet, but only if taxpayer can show that it is medically necessary and only to the extent that costs exceed
that of a normal diet
Tuition fees paid to special school for child with severe learning disabilities caused by mental or physical impairment
with a letter from attending physician (may not be for disciplinary reasons)
Childbirth classes (expense for mother-to-be only)
Fertility treatments such as shots, surgery, etc.
Expenses specifically disallowed:
Expenses of divorce when doctor or psychiatrist recommends divorce
Cost of toiletries, cosmetics, and sundry items (e.g., soap, toothbrushes, etc.)
Cost of special foods taken as a substitute for regular diet, when the special diet is not medically necessary and
taxpayer cannot show cost in excess of cost of a normal diet
Weight loss maintenance programs
Distilled water purchased to avoid drinking fluoridated water supply
Pajamas purchased to wear in hospital
Mobile telephone used for personal calls as well as calls to physician
Insurance against loss of income, loss of life or limb
Union dues for sick benefits for members
Contributions to state disability funds
Qualifying medical expenses include only those expenses incurred for Yourself, Your Spouse, and any Dependents
you list on your federal income tax return.
Any person you could have listed as a dependent on your return if that person had not received $2,000 or more gross
income or had not filed a joint return.
If you are divorced or separated any child of yours that is listed as a dependent on his or her other parent’s federal
income tax return (and certain other individuals in the case of a multiple support agreement).
IRS publication 502, Medical and Dental Expenses, has a checklist of medical expenses that can be deducted and
therefore reimbursed under this Plan, and those that cannot. You may order Publications from the IRS by calling (800)
829-3176. If you are divorced, you may also want to order Publication 503, which sets out IRS rules for which parent
is permitted to deduct what for dependents. They are available on the Internet at Forms And Publications - IRS
Please note that any health care expenses reimbursed through this Plan cannot be claimed as a deduction for income tax
purposes also. Under the Medical Reimbursement Plan, an employee will be reimbursed only for those types of medical
expenses normally deductible on your federal income tax return without regard to the 7.5% of the adjusted gross income
limitation. The following lists examples of expenses that are eligible for reimbursement by our Medical Care
Reimbursement Account. Also listed are some expenses that are expressly ineligible for reimbursement pursuant to federal
law. This list does not include every expense that is reimbursable. If you have any questions regarding the eligibility of any
expense for reimbursement, please contact the Plan’s Administrator. In addition, reimbursement is subject to the
“reasonableness” of the amount of the expense.
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GENERAL DEPENDENT CARE FSA RULES
2. The amount of your compensation reduction for each pay period during the year will be credited to a dependent care
assistance account for the year on the books of the Company and will be reimbursed up to the actual balance in that
account at time of reimbursement for your dependent care expenses incurred during the year.
3. DCA expenses are permitted only if the dependent lives in your home.
4. Reimbursement will be available only for qualifying dependent care expenses described below. You must agree to
notify the Company if you have reason to believe that any expense for which you obtained reimbursement is not a
qualifying dependent care expense and you agree on demand to indemnify and reimburse the Company for any liability
it may incur for failure to withhold federal and state income tax or Social Security tax from any reimbursement you
receive of a non-qualifying expense up to the amount of additional tax actually owed.
5. Changes or revocation of a compensation reduction agreement may not be made at any time during the calendar year
unless the change or revocation is on account of and consistent with a change in your family status, (i.e., marriage,
divorce, death of a spouse or child, birth of adoption of a child, termination of employment of a spouse and other such
events as the Plan Administrator determines will permit a change or revocation).
6. The Plan Administrator may reduce or cancel your compensation reduction, limit your reimbursements, or otherwise
modify this agreement in the event the Administrator believes it advisable in order to satisfy certain provisions of the
Internal Revenue Code.
7. The reduction in cash compensation under this agreement is in addition to any reductions under other agreements or
benefit plans. The total reductions under ALL Dependent Care Assistance Plans in which you and your spouse
participate cannot exceed the maximum allowed under this Plan.
QUALIFYING DEPENDENT CARE EXPENSES
Under the Plan you will be reimbursed only for dependent care expenses meeting all of the following conditions:
1. The expenses are incurred for services rendered after the date of this election and during the calendar year to which
2. Each individual for whom you incur the expenses is either a--
(a) dependent under age 13 for whom you are entitled to claim as a dependent on your federal income tax return
(special rules apply in certain circumstances where non-custodial parents are entitled to claim the individual as
(b) spouse or other tax dependent who is physically or mentally incapable of caring for himself or herself.
3. The expenses are incurred for the care of a dependent described above, or for related household services, and are
incurred to enable you to be gainfully employed.
4. If the expenses are incurred for services outside your household they are incurred for the care of a dependent who
is described in 2(A) above, or who regularly spends at least 8 hours per day in your household.
5. If the expenses are incurred for services provided by a dependent care center (i.e., a facility that provides care for
more than 6 individuals not residing at the facility), the center complies with all applicable state and local laws and
6. If the expenses are incurred for services provided by a camp, the dependent does not stay overnight at the camp.
7. The expenses are not paid or payable to your child who is under age 19, at the end of the year in which the
expenses are incurred, or to an individual for whom you or your spouse is entitled to a personal tax exemption as a
8. The reimbursement (when aggregated with all other reimbursements received by you under the plan during the
same year) may not exceed the least of the following limits:
(a) $5,000 ($2,500 if you do not certify that (i) you will file a joint Federal income tax return for the year with your
or (ii) you are not married).
(b) Your taxable compensation (after the reduction agreed to for dependent care assistance).
9. Tuition and educational expenses, including kindergarden are not eligible expenses.
For purposes of (a) above, if you are married to another participant in the Plan and file a joint Federal income tax return, a
single $5,000 limit applies to both you and your spouse. For purposes of (c) above, your spouse will be deemed to have
earned income of $200 ($400 if you have two or more dependents described in paragraph 2 above), for each month in which
your spouse is (i) physically or mentally incapable of caring for himself or herself, or (ii) a full-time student at an
educational institution. For all purposes of this paragraph 8, certain separated spouses are not treated as married.
For additional information order IRS Publications 503 on Dependent Care and 504 for rules governing dependents
of divorce parents.
C-4 General Cafeteria Plan Rules Page 6 of 7
OTHER PREMIUM ACCOUNT (OPA)
Many cafeteria plans will offer voluntary products to employees that can also be paid with pre-tax dollars. Under this
account, the employer will deduct the premiums and remit them directly to the insurer on your behalf, whereas under the
Other Premium Reimbursement Account, you must pay the insurance company and then receive reimbursement from the
plan for eligible expenses.
These products may include any eligible benefit permitted under Section 125 of the code, these include:
Short and/or term disability policy
Supplement Hospital and/or Accident Policy
OTHER PREMIUM REIMBURSEMENT ACCOUNT (OPRA)
If a group health plan is offered, both the employer and employee portion of the cost is paid directly to the insurance
company on behalf of employees who elect to participate. Under the OPRA, employees are reimbursed for other individual
health, accident and disability policies that they have, including COBRA premiums, on a pre-tax basis. Reimbursement is
limited to the balance in the employee’s account at any time. Deferrals are not annualized for reimbursement purposes.
These policies would be portable and could be taken with the employee upon termination and continued individually.
Example: If you have an individual cancer policy or disability policy you would like to pay on a pre-tax basis, you may
elect to defer an amount equal to the premiums. This amount would then be reimbursed on a monthly basis up to the actual
balance in the OPRA. In the case of disability benefits where the premium has been paid through a cafeteria plan, the
disability benefits would be taxable when received. If disability premiums are paid with after-tax employee dollars,
the disability benefits are tax-exempt when received. Therefore, you have to decide whether to save taxes now (sure
thing) or possibly save taxes later if you become disabled (good probability, but not a sure thing).
HEALTH SAVINGS ACCOUNTS (HSA)
If you or your spouse are participating in a High Deductible Health Plan (HDHP) that is HSA (Health Savings Account)
qualified, you may not participate in a Medical Reimbursement or Flexible Spending Account under a Cafeteria/125 Plan,
except for a Limited MRA that would only cover ancillary medical expenses for dental and vision. No medical expenses are
eligible for reimbursement until you meet the deductible under your group health plan.
However, you are permitted to contribute on a pre-tax basis to your Health Savings Account (HSA). The maximum
contribution for 2008 is based on the current maximum deductible limit for HDHP’s which is $2,850 for individual
coverage or $5,650 for family coverage. You may contribute this amount directly and tax a deduction on your tax return or
you may contribute on a pre-tax basis to this account. The maximum amount must be reduced by any HSA
contributions made on your behalf by your employer or any prior contributions you may have made directly. You
have until the time for filing your income taxes to fully fund you HSA plan.
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