Section 125 Cafeteria Plan

Cafeteria Plans

Are also known as Flexible Benefit Plans, Section 125 Plans allow employees to pay for certain benefits with pretax dollars. This allows them to save taxes on insurance premiums, out of pocket health care and or related child or dependent care expenses. Any dollar the employee defers into the flex plan is withheld before any taxes are calculated. The employer will save their portion of social security tax, Medicare, payroll and any other state-required taxes.

There are 3 basic types of Cafeteria Plans:

1. Premium Only Plan - allows employees to pay their group insurance premium contributions pretax, increasing their take home paycheck;
2. Health Care Spending Account - allows employees to use pre-tax monies to cover deductibles, co-pays and other non covered expenses
3. Dependent Care Spending Account - allows employees to save taxes on child or dependent care expenses.

The IRS-sanctioned Premium Only Plans, which were created by the Revenue Act of 1978 and are governed by Internal Revenue Code Section 125.

If you are not Co-Sharing the premium expense                                  

If you are not requiring employees to contribute to the cost of their insurance, a Section 125 Premium Only Plan allows you to do so with the least impact on employee salaries.

Any employer can sponsor a Premium Only Plan

Regular corporations, partnerships, S corporations, limited liability companies (LLCs), sole proprietors, professional corporations, and not-for-profits can all save money on payroll taxes by establishing a Premium Only Plan. While regulations prohibit a sole proprietor, partner, members of an LLC (in most cases), or individuals owning more than 2% of an S corporation from participating in the POP, they may still sponsor a plan and benefit from the savings on payroll taxes.

Begin saving money on taxes any time.

You can start a Premium Only Plan at any time. Plus, you can have a short plan year for the first year so that future plan years coincide with either your fiscal year or the calendar year. The choice is yours.

Typically, your first-year tax savings with a plan will far exceed the suggested retail price for plan installation.

One simple change in the payroll process reduces your taxes.

The Section 125 Premium Only Plan (POP) saves you and your employees money by reducing payroll taxes. It works by making one simple adjustment in your payroll process: Employees pay their portion of insurance premiums on a pre-tax basis rather than on an after-tax basis.

The Premium Only Plans vary in cost to set up and oversee the plan documents, prices range from $90 – $150 per year for small businesses with minimal accounting issues, it is usually a cost-effective addition as it reduces your taxable payroll is reduced along with your employee's taxable income. So, both you and your employees pay less in taxes.  Contact your payroll service company or check the Internet for Section 125 and get one started right away.

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Content is for informational purposes only and may not accurately reflect your specific situation. Information is not intended to provide legal, tax, or accounting advice. You should consult a qualified advisor for advice specific to your own circumstances.