A Section 125 Cafeteria Plan provides for healthcare and dependent care reimbursement, in which employees are allowed to set-aside pre-tax portions of their compensation to pay for health care and dependent care expenses that are not covered under their basic employee benefit program. These expenses include deductible,
co-pays, dental and vision expenses. They also include any portion of the premium they are required to pay for their medical insurance.

Each employee must carefully select the amount that is set aside. Under the "use it or lose it" rule, if there is any money left in the account at the end of the year, that money is returned to the employer. There is no "carry-over" provision. There is no participation by the employer.

The Section 125 Flexible Spending Account lowers salaries, thus reducing the employer's contribution to FICA by approximately 7.5%