Cafeteria Plans | |||
What Is A Section 125 Cafeteria Plan?A cafeteria plan is an employee benefits program that lets employees choose from a menu of benefits, similar to selecting items in a cafeteria.In the United States, cafeteria plans are usually established under Section 125 of the Internal Revenue Code, which allows employees to pay for certain benefits with pre-tax dollars, reducing taxable income. Common benefits available through a cafeteria plan include:
Benefits Of A Cafeteria PlanThe main benefits of a cafeteria plan (Section 125 plan) are tax savings and flexibility. Specifically, while employees benefit from the flexibility to choose benefits that fit their individual (or family) needs, employees and employers both benefit from tax savings, as described below.For Employees: Contributions for eligible benefits are deducted from paychecks before federal income taxes (and in most cases, on Social Security and Medicare taxes) are calculated. In essence, paying eligible expenses with pre-tax dollars effectively lowers the real cost of those expenses. This results in a higher take-home pay compared with paying for the same benefits with after-tax dollars. For Employers: Employers generally pay less payroll taxes because employees' taxable wages are reduced. This can create substantial savings. Example: If an employee earns $40,000 and contributes $4,000 through a cafeteria plan for eligible benefits, the employee is essentially taxed as though they earned $36,000. While the employee still pays the same for his or her expenses, an employee at a 30% tax bracket would likely save $1,200 in take-home pay (30% of the $4,000 reduction)In addition to the tax savings, cafeteria plans are also a great employee attraction and retention vehicle. Disadvantages Of A Cafeteria PlanFor Employees:
Employers must maintain a compliant written plan document that includes: 
Get Training For Your Or Your ClientsAlmost every company of any size offers a Cafeteria Plan. As mentioned herein, there are lots or rules and requirements for both employees and employers to follow, so why not get training for yourself or your clients? Select the applicable course below to help ensure compliance.Additional Resources: | |||
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