Cafeteria Plans (Section 125 Plans)

Free Money? Cafeteria Plans may be the next best thing.

Cafeteria plans, also known as section 125 plans (after the section of the Internal Revenue Code that established them), are a great way to boost your employee benefits package, while saving you money at the same time. A cafeteria plan allows employees to withhold a portion of their pre-tax salary to pay for their health insurance premiums, as well as certain medical and child care expenses.

Through cafeteria plans, employees are able to both reduce their tax burden and use pre-tax income to recoup some of their out-of-pocket medical and dependent care expenses. Employers are also benefited, as pre-tax dollars committed to a section 125 plan are not subject to payroll taxes, like FICA and FUTA. Also, cafeteria plans cost very little to set up and administer. In fact, for many employers, the cost of implementing a cafeteria plan is recovered through the tax savings realized in the first year.

As an employer, there are three (3) main benefits you can offer your employees through a cafeteria plan.

• The first is a Premium Only Plan (POP), which allows employees to pay their health and certain other group insurance premiums on a pre-tax basis by authorizing their employer to deduct these premiums directly from their gross salary. This is a double win for employees as it allows them to pay their premiums with pre-tax dollars, and also reduces their overall taxable income.
  


• The second benefit that can be offered under a cafeteria plan is a Medical Flexible Spending Account (FSA). A Medical FSA lets the employee set aside pre-tax dollars to pay certain out-of-pocket medical expenses not typically covered by their health insurance (deductibles, office co-payments, prescriptions, etc.).
  


• The third benefit is a Dependent Care FSA. With a Dependent Care FSA, employees can direct their employers to withhold up to $5,000 of their annual pre-tax salary to help them pay for eligible dependent care costs, such as child care (for children under the age of 13), long-term care for parents, care for a disabled spouse or other dependent, and summer day camp fees.

Contact us to find out how you can pump up your employee benefits package and start saving money today