Question: How Does A Section 125 Cafeteria Plan Work?

What is a cafeteria plan and how does it work?

A Cafeteria Plan allows employees to pay certain qualified expenses (such as health insurance premiums) on a pre-tax basis, thereby reducing their total taxable income and increasing their spendable/take-home income..

Is a Section 125 plan required by law?

Income tax savings for the employee: A Sec. 125 plan is required for employers who want to allow employees to choose the qualified benefits they want and avoid paying income taxes on the amount of wages they contribute to obtain those benefits.

What is a Section 125 Premium Only Plan?

A Section 125 premium-only-plan (POP), is a cafeteria plan which allows employees to pay their health insurance premiums with tax-free dollars.

What are Section 125 benefits?

In a section 125 plan or cafeteria plan, employees can pay qualified medical, dental, or dependent-care expenses on a pretax basis, which has the effect of reducing their taxable income as well as their employer’s Social Security (FICA) liability, federal income and unemployment taxes, and state unemployment taxes …

How does a cafeteria plan affect taxes?

Cafeteria plans reduce an employee’s taxable income under both the income tax and payroll tax, in contrast to 401(k) plans which are only deductible for income tax purposes.

What is included in section 125 cafeteria plan?

Essentially, a Section 125 cafeteria plan allows an employee to reduce the gross income amount used to calculate Federal, Social Security, and some State taxes. This amounts to a savings of between 25% and 40% of every dollar they contribute to the plan.

What is the difference between a cafeteria plan and a Section 125 plan?

A cafeteria plan, also known as a section 125 plan, is a written plan that offers employees a choice between receiving their compensation in cash or as part of an employee benefit. … Employer contributions toward an employee’s cafeteria-plan benefits are not taxed.

What benefits can be included in a cafeteria plan?

What is a cafeteria plan?Accident and health benefits (but not Archer medical savings accounts or long-term care insurance)Adoption assistance.Dependent care assistance.Group-term life insurance coverage.Health savings accounts, including distributions to pay long-term care services.

Is a cafeteria plan worth it?

Cafeteria plans are particularly good for participants who have regular expenses related to medical issues and child care. Employees enrolled in a section 125 plan can set aside insurance premiums and other funds pretax, which can then be used on certain qualified medical and child care expenses.

How do I set up a Section 125 cafeteria plan?

To set up a Cafeteria Plan Employee payroll item with Custom Setup:Choose Lists > Payroll Item List.Select the Payroll Item > New.Select Custom Setup > Next.Select Deduction > Next.Enter a name for your payroll item (for example, 125 Health Insurance Plan), and then select Next.More items…•

Is 401k a Section 125 plan?

When dealing with cash or deferred arrangements involving a 401(k) plan that allows employees to contribute part of their salary on a pre-tax basis. … Your matching contributions as an employer are also allowed to be deferred as part of the Section 125 plan.

What are some pros and cons of cafeteria benefits plans?

Pros and Cons of a Cafeteria PlanPay Less Tax. Employers do not pay FICA or FUTA taxes on salary reductions amounts. … Address Employee Needs. … Cost Control. … Competitive Benefit Program. … Improve Employee-Employer Relationship. … Respond to Work-Force Diversity. … Better Understanding of Benefits.

Which of the following is ineligible to participate in a Section 125 plan?

Truth: Only employees are eligible to participate in the Section 125 plan. Certain individuals, such as partners in a partnership and over 2% shareholders in an S-corporation, are ineligible to participate. While spouses and dependents cannot participate, they can receive tax-favored benefits as beneficiaries.

What is a disadvantage of cafeteria style plans?

Which of the following is a disadvantage of cafeteria-style plans? Employees selecting benefits leads to increasing costs. … Retirement plans may be contributory plans, meaning they are funded wholly by contributions from the employer.

Who needs a Section 125 plan?

IRS Requirement for pre-taxed employee benefits. If you are an employer wanting to allow your employees to pay group health and other insurance premiums with pre-tax salary deductions, the answer is yes, you need a Section 125 plan document.