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’s a major disadvantage of cafeteria benefit plans?
Employees who exceed their allocated spending amount pay a partial premium to their employer. So if Emma spends $1,000 over her allocated contribution, she pays a portion of that amount herself. The disadvantage of a cafeteria plan is
it usually takes more time to administer and is typically more complex
.
What qualifies as a section 125 cafeteria plan?
A Section 125 Cafeteria Plan is an employer-sponsored benefits plan that
lets employees pay for certain qualified medical expenses – such as health insurance premiums – on a pre-tax basis
. … Typically, they can use the pre-tax money to pay for health insurance premiums, retirement deposits, or other benefit options.
What is a Section 125 plan document?
A Section 125 Plan (aka cafeteria plan)
allows employees to pay for health insurance, certain expenses and other eligible benefits with pre-tax dollars
. Essentially, the employer offers employees the opportunity to agree to a salary deduction in exchange for the benefits.
Is a Section 125 plan required by law?
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. … Flexible spending account (FSA) benefits for the employee: FSAs can only be offered through a Sec. 125 plan.
Who is not eligible for Section 125 plan?
The Section 125 rules specifically prohibit the following individuals from participating: •
Self-employed individuals
; • Partners within a partnership; and • More than 2 percent shareholders in a subchapter S corporation (S corporation).
How much does it cost to set up a Section 125 plan?
Section 125 Plan Document package
$99
. The IRS requires a Section 125 Plan Document so that employees can pay for health premiums, FSA contributions, and other group benefits with tax-free payroll deductions.
What are the disadvantages of cafeteria?
- Businesses can only offer a cafeteria plan to employees. …
- Some of the benefits are only available for a limited time. …
- It may require workers to pay out-of-pocket expenses. …
- There can be initial setup fees that must get paid.
What are the four categories of cafeteria plans?
- Flex Account. One of the most common cafeteria plans is a flex account, or flexible spending account (FSA). …
- POP Plan. Next is a Premium Only Plan (POP). …
- Dependent Care Account. Finally, the last type of cafeteria plan is a Dependent Care flexible spending account.
What are some pros and cons of cafeteria benefits plans?
- Pay 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.
How does a Section 125 Plan Work?
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 …
Are Section 125 plans taxable?
A Section 125 plan is part of the IRS code that enables and allows
employees to take taxable benefits
, such as a cash salary, and convert them into nontaxable benefits. These benefits may be deducted from an employee’s paycheck before taxes are paid.
When should I update my Section 125 plan document?
Section 125 of the Internal Revenue Code (the Code) requires that Premium Only or Cafeteria plan documents be updated
every five years
. This means drafting a new document and giving a copy to every employee eligible for the plan.
What taxes are Section 125 plans exempt from?
In the context of Section 125, “pre-tax” means that a deduction is exempt from
Federal Income Tax Withholding, Social Security and Medicare Taxes
. The employer also saves, because a Section 125 deduction also reduces the employer’s portion of the Social Security and Medicare tax liability.
Can you cancel a Section 125 plan?
An
employee can voluntarily cancel coverage at any time only if the company is not having employee premium contributions deducted pre-tax
. If they are, they are de facto enrolled in a Section 125 Plan and cannot change that election until Open Enrollment or a Qualifying Life Event.
Is a Section 125 plan worth it?
Section 125 plans offer
employees significant tax savings
and could be an appealing part of any benefits package. Offering an appealing compensation plan is a great way to attract and retain employees, but a quality compensation plan includes not just a high salary but also an attractive benefits package.
