Section 125 Cafeteria Plans
Section 125 Cafeteria plans were originally provided for when Section 125 of the Internal Revenue Code (IRC) was established in 1979. Since then there have been numerous changes and clarifications that have allowed section 125 Cafeteria Plans to evolve into their current form.
Employees Reduce Taxable Income with a Section 125 Cafeteria Plan
A section 125 Cafeteria Plan allows employees to pay for certain costs on a pre-tax basis. Allowable group insurance premiums include those paid for medical insurance, dental insurance, vision care insurance, group life insurance for coverage up to $50,000 per employee, and disability income insurance. In addition, employees can pay for otherwise non-reimbursed health care costs and day care costs by participating in a Heath Care Flexible Spending Account and a Day Care Flexible Spending Account.
Employees can decrease their federal and state income taxes as well as Social Security and Medicare taxes. Savings usually range from 20% to 40% of pre-tax contributions depending upon an employee’s actual tax rates.
Employers Reap Tax Savings Benefits by Offering a Section 125 Cafeteria Plan
Employer tax savings can be as much as 7.65% of employee pre-tax contributions as a result of decreased Social Security and Medicare wages. These savings usually equal or exceed any design and administration costs.
In order to establish a Section 125 Cafeteria Plan, a written Plan Document, a Summary Plan Description, and other administration forms are required.
Non-Discrimination testing also must be performed to demonstrate that the Plan does not discriminate in favor of Highly Compensated and Key employees.