Section 125 Cafeteria Plan: Complete Guide 2024

Integrating a Section 125 cafeteria plan with a health savings account (HSA) can be a powerful way to help your employees save money on healthcare expenses and build up savings for future healthcare needs. By offering a Section 125 cafeteria plan, you can help your employees save money on taxes while also providing them with a comprehensive benefits package that can help attract and retain top talent. For employees to be able to make tax-free payroll deductions for health insurance premiums, FSA payments, and other group benefits, the IRS mandates a Section 125 Plan Document. These insurance policies are supplemental benefits because they are not primary medical coverage or a substitute for major medical insurance.

The permitted taxable benefit can include cash, various types of paid time off, and/or severance pay. Therefore, qualified benefits can include such popular items as accident and health plans, group term life insurance, and dependent care assistance programs. Deferred compensation, except for certain exceptions such as Sec. 401(k) contributions, is not allowed.

1. I’m Misty Berryman, and I’m one of your Personal Benefits Managers.
2. It is essential to conduct non-discrimination testing annually to maintain compliance.
3. Employers can be C corporations, S corporations, LLCs, partnerships, governmental entities or sole proprietorships.
4. When you participate in a Cafeteria Plan, your taxable income is reduced by the amount you contribute to your FSA, HSA, or other eligible benefits.

The benefits are available to employees, their spouses, and their dependents when a plan is created. Depending on the circumstances and details of the plan, Section 125 benefits may also extend to former employees but the plan cannot exist primarily for them. Keep in mind that each employer’s https://adprun.net/ might have different options and rules, so be sure to review your plan’s specific features when making your selections during open enrollment.

COMMON ERRORS IN SEC. 125 PLANS OF SMALL BUSINESSES

A Section 125 plan lets employees set aside insurance premiums and other funds on a pretax basis. This can save workers 20% to 40% in taxes per year but these plans offer employers some tax-saving benefits as well. It can be worth it to suggest that your employer set up such a plan or keep it in mind if you’re job hunting so you can potentially hire on with a company that does offer a cafeteria plan. Employees who are enrolled in a Section 125 plan can set aside insurance premiums and other funds pretax, which can then go toward certain qualified medical and childcare expenses. Depending on where they live, participating employees can save from 20% to 40% in combined federal, state, and local taxes on a variety of items that they typically already purchase with out-of-pocket post-tax funds. Employers can save an additional 7.65% on their share of payroll taxes.

If you pay for these expenses upfront, you can submit a claim and necessary documentation to a plan administrator for reimbursement from your accounts. Several required documents are designed to ensure that a cafeteria plan is compliant with laws and regulations. Cafeteria plans (also known as Section 125 plans) are a type of benefit some companies offer to their employees. These employees set aside money, pre-tax, and spend it on a  number of different benefits. Benefits include health insurance, accident insurance, adoption assistance and group term life insurance.

Origin of cafeteria plan

This reduces the amount of money that they receive as compared to their total remuneration. With a cafeteria plan, one can select some options which include insurance benefits, pension and other benefits that help with life events. These benefits are tax-free, therefore by using the cafeteria plan, the income they receive is increased. If they were to receive the salaries first and then pay for the life benefits afterwards, the amount that would be deducted through the tax would be higher, and their receivable income would be lower. A Section 125 plan typically lets employees use pretax money to pay for health insurance premiums for medical, dental, and vision. Other options include retirement deposits, supplemental life or disability insurance, Health Savings Accounts, and various medical or dependent care expenses.

What is a Cafeteria Plan Provided by an Employer?

That experience gives her a unique understanding of how the consumer-focused content she writes flows into each marketing piece. Don’t leave unspent money in it on December 31st because you’ll be forfeiting it to your employer (your FSA balance can be rolled over from year-to-year). Internal Revenue Service regulations prevent you from participating as an employee in a Section 125 plan if you’re self-employed, a partner in a partnership, or own more than 2 percent of a subchapter S corporation. The following list of dual-purpose over-the-counter items can be reimbursed if used for medical purposes. They must be accompanied by a medical practitioner’s note stating the item is to treat a
specific medical condition and not a cosmetic procedure.

Employees can take some money from their paychecks and put it into this savings account to pay for IRS-approved medical and healthcare costs. The employee should add a certain amount of cash into the account each year, up to a maximum limit. To obtain this program, an employee should have an HDHP (high-deductible health plan) to save up for qualified medical costs. This specific type of health insurance plan provides low premiums and high deductibles, which makes it highly beneficial for each employee who chooses it. An important feature of cafeteria plans is that the employee has to be able to choose not to contribute to the plan.

Are there contribution limits for HSAs under a Section 125 plan?

A cafeteria plan might allow for the funding of an HSA, also known as a health savings account. It usually encompasses a variety of taxable and non-taxable perks provided by an employer. For example, let’s say you’re taxed on 30 percent of every dollar you make. If you choose to direct $100 of your pre-tax income to your Section 125 account, you’ll be able to spend the full $100 on qualified expenses instead of only $70 if you had received all of your pay on an after-tax basis. Employers must ensure that the rules outlined in the plan document and SPD are followed. Failure to administer a plan in accordance with the written terms of the plan and the IRC can result in the loss of the benefits’ pretax status.

Cafeteria plans can provide flexibility to employers and employees, as well as welcome tax savings. Many employers use cafeteria plans to allow employees to pay for supplemental coverage on a pretax basis, often along with offering other types of qualified benefits. Still, using a cafeteria plan model carries additional administrative and compliance issues. In addition, pretax payment of supplemental benefits premiums can have an effect on the employee’s taxes on the back end. Employers should consult their own tax and benefits plan consultants to determine what is right for them. Section 125 plans allow employees to contribute pretax dollars into the plan.

Frequently Asked Questions about Section 125 Cafeteria Plans and HSAs

The “election” amount is deducted from the employee’s paycheck automatically for each payroll period. If your company offers a cafeteria plan, you’ll most likely be able to sign up during your company’s open enrollment period. If you decide you want to enroll, you can choose or “elect” how much you’d like to contribute to your plan. Employees’ changing circumstances may result in continual administration. This can partly be rectified by only allowing benefits to be changed periodically. For example, your company may only allow you to change your cafeteria plan benefits once a year.

Contributions toward plans are not subject to federal, state, or social security taxes. The contributions are placed into an account the employee can use to pay for allowed expenses (e.g., premiums for health insurance, dependent care costs, medical supplies). Since no federal, state, or social security taxes are taken out and the dollars are not included as gross income, the employee saves anywhere from 27 percent to 50 percent on these purchases. A Section 125 Cafeteria Plan is an employer-sponsored benefits program that lets employees pay for certain qualified medical expenses, such as health insurance premiums, on a pre-tax basis.