Section 125 “Cafeteria” Plans
What is it?
A cafeteria plan is an arrangement that helps save both the employee and employer tax dollars by reducing taxable income. Section 125 of the IRS Code details all the rules for obtaining these tax benefits, so many people use the terms “cafeteria plan” and “Section 125 plan” interchangeably. All cafeteria plans offer a choice between cash (e.g. regular pay) and nontaxable benefits (e.g. health insurance).
The simplest type of cafeteria plan is the Premium Only Plan – “POP”. This plan allows employees to have insurance premiums deducted from their paychecks before taxes are withheld.
How is it administered?
Administration duties fall upon the employer or a third party administrator and only certain benefits are allowed to be offered under a cafeteria plan such as:
| ● Health insurance | ● Group life ($50,000 or less) and AD&D | |
| ● Dental insurance | ● Paid vacation days | |
| ● Vision insurance | ● Group long term disability | |
| ● FSA & HSA contributions | ● Adoption assistance | |
| ● 401(k) contributions | ● DCAP contributions |
What is the 'Use it or Lose it Rule'?
One of the main features of a cafeteria plan is the “Use it or Lose it” rule. This means that the employee determines in advance for a 12-month plan year how much money will go towards their benefits. Any money left unused at the end of the plan year is forfeited to the employer.
Additional information regarding Cafeteria Plans can be obtained by clicking here.
Our expert staff can assist you with setting up a Section 125 plan that meets the needs of your employees and organization.
