Cafeteria / Section 125 plans

 

Cafeteria plans (also known as Section 125 or Flexible Spending Accounts) are reimbursement plans governed by the IRS.  They allow employees to contribute a certain amount of their gross income to a designated account prior to taxes being calculated. Employees may then use the account to pay for medical or dependent care costs not covered by insurance, and do not have to pay income taxes on these funds.

 

Cafeteria plans enable employers to reduce employees' gross income, thus reducing the amount the business pays in Social Security (FICA), Federal Unemployment Tax (FUTA), Workers' Compensation, and some State taxes.

 

Section 125 Cafeteria plans benefit both the employee and the employer and are very low cost to maintain.

Premium Only Plan (POP)

Premium Only (POP) Plans are typically low-cost to the Employer and allow employees to pay their health insurance premiums with tax-free dollars.  Contributions to the group health insurance premiums are deducted prior to taxes being calculated so employees take home more pay and don't owe taxes on that portion of their income at the end of the year.  POP plans result in tax savings for the employee and the employer.  The employer is required to maintain proper documentation regarding the POP plan.  The Employer saves on FICA taxes, unemployment taxes, and workers compensation.

Flexible Spending Account (FSA)

An FSA is an account that Employees use to deposit a portion of their salary to be used for reimbursement of out of pocket medical expenses.  The wages that are taken out and put into the FSA are not taxed so the Employee saves a significant amount of money on income taxes.  Medical, dental and vision expenses that can be reimbursed are those that are not covered by health insurance.  A second component to the FSA is Dependent Care Expense reimbursment.  The cost of childcare is deducted from the employee's wages and put in to the FSA account which reimbureses the Employee for dependent care expenses.  Again, the Employee saves a significant amount on income taxes by having those expenses deducted pre-tax.

Plans Available under Section 125 Cafeteria Plan

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