Section 125 - Cafeteria Plan

Section 125 Plan Information and Rules

A Section 125 cafeteria plan, also known as a cafeteria plan or a flexible benefits plan, is an employee benefit arrangement governed by Section 125 of the Internal Revenue Code. It allows employees to choose from a menu of pre-tax benefits and allocate their compensation to pay for those benefits.

Under a Section 125 cafeteria plan, an employer establishes a plan that offers a selection of benefits to eligible employees. These benefits can include health insurance, dental insurance, vision insurance, flexible spending accounts (FSAs) for medical expenses or dependent care, group term life insurance, and other qualified benefits.

Here's how it works:

• Eligible employees choose from a range of benefit options provided by the employer.

• The employer deducts the selected benefit costs from the employee's paycheck before taxes are applied.

• The employee's taxable income is reduced, which in turn lowers their federal, state, and FICA (Social Security and Medicare) taxes.

• The employer then uses the funds deducted from the employee's paycheck to pay for the selected benefits.

• By using a Section 125 cafeteria plan, both employees and employers can save money on taxes. Employees can pay for their chosen benefits with pre-tax dollars, which effectively reduces their taxable income and increases their take-home pay. Employers can also save on payroll taxes because the amount allocated to employee benefits is not subject to certain employment taxes.

It's important to note that Section 125 cafeteria plans have certain rules and limitations, including restrictions on changing benefit selections during the plan year.