Cafeteria plans, sometimes referred to as Section 125 because of the tax code where the law is spelled out, are a way for employers to use pretax earnings to cover qualified healthcare expenses. These type of plans are appealing to employees because it offers them a greater level of choice in determining their own benefits (think choosing from food selections at a cafeteria). For business owners, a cafeteria plan can be a good way to reduce taxes and payroll expenses.
A qualified section 125 plan must give employees a choice between a taxable and nontaxable benefit option. Businesses that offer a cafeteria plan to their employees allow them to make their own choices about group health plans, health savings accounts, life insurance and long-term care.
Flex spending accounts are one of the more popular benefit choices that fall under the umbrella of section 125.
The are benefits on both sides when a company offers employees a cafeteria plan. Employees that have regular health care expenses can reap significant tax benefits, especially from an FSA, since much of the cost can be covered essentially tax-free. For employers, a section 125 plan allows them to save money on both payroll and taxes through the tax-sheltered status of the benefit.
Want to know about cafeteria plans? This resource from the IRS covers some of the commonly asked questions regarding section 125 regulations.
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