Time to Utilize a Section-125 Health Plan

A Section 125 Health Plan (often called a Cafeteria Plan) is an IRS-approved benefits program that allows employees to pay certain health and insurance expenses with pre-tax dollars—reducing both their taxable income and the employer’s payroll tax liability.

Here’s a clear breakdown:

🔹 What It Is

A Section 125 plan is a formal written plan under Section 125 of the Internal Revenue Code that lets employees choose between:

• Taxable income (their regular cash wages), or

• Qualified benefits (health premiums, supplemental coverage, FSA, etc.) paid for on a pre-tax basis.

🔹 How It Works

When employees elect to participate, their portion of benefit costs is deducted from pay before taxes are calculated.

• Employees save on federal, state, and FICA taxes.

• Employers save on matching FICA taxes—typically about 7.65% per participating employee.

🔹 Common Types of Section 125 Plans

1. Premium-Only Plan (POP): Lets employees pay their share of health insurance premiums pre-tax.

2. Flexible Spending Account (FSA): Allows pre-tax contributions for medical, dental, vision, or dependent care expenses.

3. Full Cafeteria Plan: Offers a menu of both taxable and nontaxable benefits for employees to choose from.

🔹 Why Employers Use It

• Reduces overall payroll tax burden.

• Increases employee satisfaction and participation in benefits.

• Provides a no-net-cost way to expand benefits offerings.

In short:

A Section 125 plan is a tax-advantaged benefits structure that helps both employers and employees save money while enhancing benefit options — a classic win-win.

 

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