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Cafeteria Plans - Section 125

Saving Tax Dollars for Employees & Employers

What is a Cafeteria Plan?

A Cafeteria Plan is an employee benefit program. Designed to take advantage of Section 125 of the Internal Revenue Code a Cafeteria Plan allows employees to pay certain qualified expenses (such as health insurance premiums) on a pre-tax basis, thereby reducing their total taxable income and increasing their spendable/take-home income. Funds set aside in FSA accounts are not subject to Federal, State, or Social Security taxes. On average, employees save from $.25 to $.49 for EVERY dollar they contribute to the FSA.

health plans onlinePremium Only Plans (POP)

Employers may deduct the employee’s portion of the company-sponsored insurance premium directly from said employee’s paycheck before taxes are deducted.  

health plans onlineFlexible Spending Plans (FSA)

Employees may set aside in a Flexible Spending Account (FSA) a pre-established amount of money per Plan year on a pre-tax basis. The employee can use the funds in the FSA to pay for eligible medical, dependent care, or transportation expenses.  

Benefits to the Employer

Employers may add a FSA Plan as a key element in their overall benefit package. Because an FSA Plan offers a tax-advantage, employers experience tax savings from reduced FICA, FUTA, SUTA, and Workers’ Compensation taxes on participating employees. These tax savings reduce or eliminate altogether the various costs associated with offering the Plan. Meanwhile, employee satisfaction is heightened because participating employees experience a “raise” at no additional cost to the employer.

Increased participation equals greater tax savings to the employer. Thus, to promote participation in the Plan, employers may wish to contribute to each employee’s FSA account. 

Benefits to the Employee

An employee who participates in the FSA must place a certain dollar amount into the FSA each year. This “election” amount is automatically deducted from the employee’s check (for that amount divided by the number of payroll periods). For example, an employee is paid 24 times a year, and elects to put $480.00 in the FSA. Thus, $20.00 is deducted pre-tax from each paycheck and is held in an account (by the Plan administrator) to be reimbursed upon request.

 

Premium Only Savings Example

Savings Comparison
With POP
Without POP
Monthly Salary
$2,500  
$2,500  
  - Pre-Tax Insurance Premium
$150  
 
Taxable Salary
$2,350  
$2,500  
 

Employer Taxes:
FICA (7.65%)
$180  
$191  
Worker's Comp* (4.36%)
$102  
$109  
Total Withholding Taxes
$282  
$300  
 
Employer Monthly Savings
$18 a month per employee
Employer Annual Savings
$216 a year per employee
 

Employee Taxes:
FICA (7.65%)
$180  
$191  
Federal (13.35%)
$314  
$334  
State (4%)
$94  
$100  
Total Withholding Taxes
$588  
$625  
 
Employee Monthly Savings
$37 a month per employee
Employee Annual Savings
$444 a year per employee

*Workers' Compensation savings eligible only in CA

Full Flex Plan Savings Example

Savings Comparison
With Flex
Without Flex
Monthly Salary
$2,500  
$2,500  
Pre-Tax Flex Plan Elections:
   - Insurance Premium
$150  
 
   - Unreimbursed Health Care Expense
$100  
 
   - Dependent Care Expense
$400  
 
Total Pre-Tax Flex Plan Elections
$650  
 
Taxable Income
$1,850  
$2,500  
 

Employer Taxes:
FICA (7.65%)
$142  
$191  
Worker's Comp* (4.35%)
$80  
$109  
Total Withholding Taxes
$222  
$300  
 
Employer Monthly Savings
$78 a month per employee
Employer Annual Savings
$936 a year per employee
 

Employee Taxes:
FICA (7.65%)
$142  
$191  
Federal (13.35%)
$247  
$334  
State (4%)
$74  
$100  
Total Withholding Taxes
$463  
$625  
 
Employee Monthly Savings
$162 a month per employee
Employee Annual Savings
$1,944 a year per employee

*Workers' Compensation savings eligible only in CA

Miscellaneous Links

 

Setup Guidelines

Section 125 Plan documents can include or exclude employee contributions to their Health Savings Accounts. If an employer is going to offer an "HSA qualified health plan" to their employees, and wants to allow employees the option to deposit a portion of their paychecks into their HSA, then you should buy the document that has the wording to allow deductions on a pretax basis.

Click on the link below to purchase your documents. You will need to provide some company information such as your Federal ID number.

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