Section 125 Cafeteria Plan

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A Section 125 Cafeteria Plan (includes Premium Only Plans and Flexible Spending Accounts) is an employee benefits 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 Flexible Spending Accounts (FSAs) are not subject to federal, state, or Social Security taxes.

Premium Only Plan (POP)

Employers may deduct the employee’s portion of the company-sponsored insurance premium directly from the said employee’s paycheck before taxes are deducted. A POP must be setup according to IRS guidelines in order for the company to withdraw premiums for medical, dental, or vision insurance pre-tax.  The setup fee is typically $200, and renews at $100 per year.

Flexible Spending Account (FSA)

In an FSA, employees may set aside on a pre-tax basis a pre-established amount of money per plan year.  The employee can use the funds in the FSA to pay for eligible medical, dependent care, or transportation expenses.

Benefit to the Employer

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.

Benefit 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).  A huge advantage for participants is the uniform coverage where the plan allows them to experience medical expenses at any time of the year with no worry about having the funds available at the time the expense is incurred.  For example:  If you have established your yearly contribution to be $1,200, and you incur a medical expense after 3 months (only contributing $300 so far) you can legally expend the full $1,200 assuming that your payroll contributions will continue as planned.  Uniform coverage applies to the medical FSA only; it does not apply to a Dependent Care FSA.

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