Section 125 Cafeteria Plans
Although the plan goes by a variety of names, such as
Premium Only Plans (POP), Salary Reduction Plans, Flexible
Benefit Plans and Premium Conversion Plans, all are based on
the guidelines of the Internal Revenue Code Section 125.
Essentially, a section 125 Plan permits employees to purchase
fringe benefits with pre-tax dollars instead of after-tax dollars.
The election by employees to voluntarily reduce their gross
taxable income results in an employee paying fewer taxes in the
area of Federal, State and FICA taxes. Furthermore, when the
employee reduces his gross taxable income, the employer also
saves money by paying less FICA on the reduced payroll base.
How the Cafeteria Plan Works
Eligible employees may voluntarily elect to purchase qualified
insurance benefits (Health Plans, Disability Plans, Cancer
Plans, Medical Supplement Plans and Group Term Life
Insurance Plans) and have premiums for these benefits
deducted from their paycheck before taxes are taken out. This
will result in employees paying less taxes and having more take
home pay. The Employer will pay less FICA contributions, which
will increase the business bottom line and make the benefits
more affordable to its employees.
|Section 125 Cafeteria Plan