Section 125 plan

Section 125 Plan

A Section 125 plan, also known as a cafeteria plan, is a type of employee benefit plan offered in the United States that allows employees to choose from a variety of pre-tax benefits. These plans are named after Section 125 of the Internal Revenue Code, which governs their operation. The primary advantage of a Section 125 plan is that it allows employees to pay for certain benefits with pre-tax dollars, thereby reducing their taxable income and increasing their take-home pay.

Overview

Section 125 plans are designed to provide employees with a choice of benefits, similar to how a cafeteria offers a variety of food options. Employees can select the benefits that best meet their needs from a menu of options. These plans can include a range of benefits such as health insurance, dental and vision insurance, life insurance, and flexible spending accounts (FSAs).

Types of Section 125 Plans

There are several types of Section 125 plans, each with its own features and benefits:

• Premium Only Plans (POP): These plans allow employees to pay their share of insurance premiums with pre-tax dollars. This is the simplest form of a Section 125 plan.

• Flexible Spending Accounts (FSAs): FSAs allow employees to set aside pre-tax dollars to pay for eligible medical expenses, dependent care expenses, or both. There are two main types of FSAs:

 * Health Care FSA: Used to pay for out-of-pocket medical expenses not covered by insurance.
 * Dependent Care FSA: Used to pay for dependent care expenses, such as daycare for children.

• Full Cafeteria Plans: These plans offer a wider range of benefits and allow employees to choose from a variety of pre-tax and post-tax benefits.

Advantages

The primary advantage of a Section 125 plan is the tax savings it offers to both employees and employers. Employees benefit from reduced taxable income, which can lead to significant tax savings. Employers benefit from reduced payroll taxes, as the pre-tax contributions are not subject to Social Security, Medicare, or federal unemployment taxes.

Compliance and Regulations

Section 125 plans must comply with various regulations set forth by the Internal Revenue Service (IRS). Employers must ensure that their plans are properly documented and that they conduct nondiscrimination testing to ensure that the plan does not favor highly compensated employees.

Also see

• Flexible Spending Account
• Health Savings Account
• Employee Benefits
• Internal Revenue Code