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What is a Section 125 Cafeteria Plan?

Monday, April 19th, 2010

One of the most under used employee benefits for any business today is the Cafeteria Plan. A Cafeteria Plan, or a Flexible Benefits Plan. It is basically an Employee Benefits plan, assigned to aid the employee avail of Section 125 – the Internal Revenue Code – and was legally implemented under the IRS Code – Section 125 in 1978. This plan would ideally allow an employee to elect certain tax benefits – on a pre tax base in the form or Qualified Expenses (for example – a health insurance premium). Thus, in turn, reducing the total tax paid and, in turn, allowing them to have more in-hand income.

The advantages are:

1. Employees can save on much needed income tax – thus taking home a larger pay

2. Employees can now save on the payroll taxes

3. The morale of the employee gets boosted

4. There is no net cost incurred to implement this sort of a plan

5. Funds put into these accounts are not subject to Federal Taxes – State Taxes or Social Security Taxes.

6. On an average, for every dollar they contribute to the FSA people save any where from $.25 to $0.49!

In this plan, if you are an employee and you have not been reimbursed for your medical expenses, you can manage them through a Medical Flexible Spending Accounts (FSA). A Medical FSA allows you to fund some medical expenses on a pre tax basis. This also allows you to pay for dependant care.

Cafeteria plans provide the necessary funds for the employer to purchase fringe benefits. There are three ways an employer can fund a fringe benefits plan, namely:

a.) Employer Direct Contributions

b.) Employee Pre Tax Contributions

c.) Employee Post Tax Contributions

In a nutshell, Cafeteria Plans, are not only beneficial to an Employee, but have a vast scope to directly, and indirectly aid the employer as well! To know about the other employee benefits we could help you with, please view our complete services list.