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October 11, 2019
Understanding Section 125 Cafeteria Plans
A cafeteria plan, also known as a section 125 plan, is a written plan that offers employees a choice between receiving their compensation in cash or as part of an employee benefit. If taken as a benefit, the employee generally receives two tax advantages:
Employee contributions toward cafeteria-plan benefits are made pre-tax.
Employer contributions toward an employee's cafeteria-plan benefits are not taxed.
The tax savings for employees through the use of pretax dollars to pay for benefits can be substantial. For example, an employee who spends $200 a month in pretax dollars for benefits can, in effect, save $60, assuming about 30 percent of the $200 would have gone to federal, state and local income taxes and FICA (Federal Insurance Contributions Act), the taxes deducted for Social Security and Medicare.
Employee contributions toward cafeteria-plan benefits are made pre-tax.
Employer contributions toward an employee's cafeteria-plan benefits are not taxed.
The tax savings for employees through the use of pretax dollars to pay for benefits can be substantial. For example, an employee who spends $200 a month in pretax dollars for benefits can, in effect, save $60, assuming about 30 percent of the $200 would have gone to federal, state and local income taxes and FICA (Federal Insurance Contributions Act), the taxes deducted for Social Security and Medicare.
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