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:
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.
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.
Premium-Only Plan (POP): Lets employees pay their share of health insurance premiums pre-tax.
Flexible Spending Account (FSA): Allows pre-tax contributions for medical, dental, vision, or dependent care expenses.
Full Cafeteria Plan: Offers a menu of both taxable and nontaxable benefits for employees to choose from.
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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