Section 125 Plans

About

Section 125 of the Internal Revenue Code provides for the creation of a reimbursement mechanism allowing employees to contribute a portion of their income into one or more accounts on a pre-tax basis.  These pre-tax funds can then be used to pay for insurance premiums, medical expenses, dependent care expenses, or transportation and parking expenses not covered by insurance.

The employer may make further contributions to the plan (in addition to an employee’s own salary reductions), which employees may also use to purchase allowable benefits. Allowable benefits include the following:

  • Dependent care assistance programs (daycare)
  • Uninsured medical and dental expenses
  • Group medical, dental, disability, and life insurance premiums

Because cafeteria plans allow employees to choose the benefits they want, they are often referred to as flexible spending accounts or flexible benefit plans.

Advantages

Section 125 “Cafeteria Plans” are a benefit to both employees and employers:

  • Employee Benefit

    Employees are able to pay eligible expenses on a pre-tax basis, saving anywhere from 25% to 50% in Federal, State, and FICA (Social Security) taxes.

  • Employer Benefit

    Employers are able to reduce their employees’ gross income, reducing the amount the company pays in Federal Insurance Contributions Act (FICA or Social Security), Federal Unemployment Tax Act (FUTA), Workers’ Compensation and some State taxes.