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Section 125 - Cafeteria Plans

Cafeteria plans increase employee take home pay at no expense to the employer. As a tax saving device, both employers and employees may enjoy significant tax savings. Cafeteria plans, also known as flexible benefit or Section 125 plans, give employees the opportunity to customize their benefit package to meet their particular needs, individual choices are particularly valuable. Cafeteria plans are specially authorized by Section 125 of the Internal Revenue Code.

A typical cafeteria plan allows employees to "redirect" part of their salary to purchase benefits from a "menu" of benefits. These amounts are redirected before an employee’s wages are subject to Federal or State income tax or Social Security taxes (FICA). An employer may also make contributions to the plan on behalf of its employees. These employer contributions are not taxable to the employee if the employer money is used for "qualified" benefits.

Employee participation in a cafeteria plan also reduces the employment taxes paid by an employer. Employee redirections are not subject to FICA or FUTA employment taxes.

Allowable benefits include flexible spending accounts such as dependent care assistance (day care), health care reimbursement (out-of-pocket medical expenses not covered by a group medical plan), and insurance premium reimbursement for employer approved group plans (life, medical, and disability insurance). Non-spending benefits include premium conversion that allows employees to pay premiums for employer sponsored group plans using pre-tax earnings.

Cafeteria plans provide employees valuable benefits, while increasing disposable income, reducing taxes, and reducing your employment taxes. Please contact us to find out more.

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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

This page was last updated on Wednesday, January 02, 2008 11:22 AM