Section 125 Cafeteria Plan
A Cafeteria Plan (includes Premium Only Plans and Flexible Spending Accounts) is an employee benefits program designed to take advantage of Section 125 of the Internal Revenue Code. A Cafeteria Plan allows employees to pay certain qualified expenses (such as health insurance premiums) on a pre-tax basis, thereby reducing their total taxable income and increasing their spendable/take-home income. Funds set aside in Flexible Spending Accounts (FSAs) are not subject to federal, state, or Social Security taxes. On average, employees save from $.25 to $.49 for EVERY dollar they contribute to the FSA
Qualified Benefits
A cafeteria plan, as defined in Section 125 of the Internal Revenue Code, is a plan in which all participants are employees who choose from a minimum of two or more benefits that consist of cash and qualified benefits. Those benefits include:
- Accident and Health Plans
- Dependent Care Assistance Programs
- Group Term-Life Insurance
- Short-Term or Long-Term Disability Coverage
- Health Savings Accounts
- Elective Contributions to a Section 401(k) Plan
- Elective Vacation Days
- Cash
- Flexible Spending Accounts
- Adoption Assistance
Items
Monthly Salary
Insurance (Pre-Tax)
Estimated TRS (6.4%)
Taxable Gross Income
Federal Taxes (20%)
Insurance (After Tax)
Take Home Pay
With Section 125
$3000.00
($700.00)
($192.00)
$2108.00
($421.60)
($75.00)
$1611.40
Without Section 125
$3000.00
N/A
($192.00)
$2808.00
($561.60)
($775.00)
$1471.40
This sample paycheck with Section 125 Cafeteria Plan has $140 of more spendable income per month! With that income, it has the potential annual savings of $1,680.
FAQ'S
What is Section 125 Cafeteria Plans?
A Cafeteria Plan (includes Premium Only Plans and Flexible Spending Accounts) is an employee benefits program designed to take advantage of Section 125 of the Internal Revenue Code. A Cafeteria Plan allows employees to pay certain qualified expenses (such as health insurance premiums, medical expenses and dependent care) on a pre-tax basis, thereby reducing their total taxable income and increasing their spendable/take-home income.
As an employer, why should I provide Section 125 Cafeteria Plans?
There are tax advantages for both the employees and employers when establishing a Cafeteria Plan. The employer can lower their payroll taxes, which in turn can lower their workers’ compensation premium.
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