Introduction
Section 125 plans, commonly known as “cafeteria plans,” have become a popular way for employers to offer valuable benefits while saving on taxes. But what exactly is Section 125, and how does it benefit both employees and employers? In this guide, we’ll cover the basics of Section 125, why it’s so beneficial, and what types of expenses qualify for pre-tax savings.

What is a Section 125 Plan?
Section 125 of the Internal Revenue Code allows employers to offer pre-tax benefits, which means employees can pay for certain expenses before taxes are applied to their income. This arrangement reduces the taxable income of employees, lowering their tax liability and increasing their take-home pay.

• How It Works: In a Section 125 plan, employees set aside pre-tax income to cover eligible expenses, such as health insurance premiums, dependent care, and flexible spending accounts (FSAs). By reducing taxable income, both employees and employers can save on federal and payroll taxes.

Types of Section 125 Plans
There are a few main types of Section 125 plans, each with different benefits and eligibility requirements:

1. Premium-Only Plans (POPs): These plans allow employees to pay for their portion of health insurance premiums with pre-tax dollars.
2. Flexible Spending Accounts (FSAs): FSAs allow employees to set aside pre-tax income for healthcare or dependent care expenses. FSAs generally have a “use-it-or-lose-it” rule, meaning funds must be spent within the plan year.
3. Dependent Care Assistance Programs: These are used to pay for qualifying dependent care expenses, helping employees save on childcare costs.

Benefits of a Section 125 Plan
For both employees and employers, Section 125 plans offer numerous benefits:

• Employee Savings: By using pre-tax dollars, employees can reduce their taxable income, potentially saving hundreds of dollars each year.
• Employer Savings: Employers save on payroll taxes by reducing the amount of employee income that is subject to FICA taxes.
• Enhanced Benefits Package: Offering a Section 125 plan makes your benefits package more attractive, helping you attract and retain talent.

Eligibility Requirements
To qualify for a Section 125 plan, employees typically need to work full-time. Employers should ensure that their plan complies with IRS regulations and that only eligible expenses are included.

Conclusion
Section 125 plans are a valuable tool for both employers and employees, providing tax savings and increased access to health and dependent care benefits. By understanding the basics of Section 125, companies can better support their workforce and make the most of their benefits offerings.