Cafeteria Plan.

A Cafeteria Plan is a separate written plan maintained by an employer for it's employees that meets the specific requirements and regulations of Section 125 of the Internal Revenue Code. It provides participants an opportunity to receive certain benefits on a pretax basis. Participants in a Cafeteria Plan must be permitted to choose among at least one taxable benefit (such as cash) and one qualified benefit.

A qualified benefit is a benefit that does not defer compensation and is excludable from an employee’s gross income under a specific provision of the Code, without being subject to the principles of constructive receipt.

The written plan must specifically describe all benefits and establish rules for eligibility and elections.

A Section 125 plan is the only means by which an employer can offer employees a choice between taxable and nontaxable benefits without the choice causing the benefits to become taxable. A plan offering only a choice between taxable benefits is not a Section 125 plan.

SECTION 125 CAFETERIA PLAN

Simple and effective way to add benefits. Section 125 plans (includes Premium Only Plans and Flexible Spending Accounts) provide a simple and effective way to add employee benefits, especially for businesses with a number of employees who regularly have medical and childcare expenses. Employees can deduct their insurance premiums pretax and set aside pretax funds to use toward qualified medical and dependent care expenses.

For business owners, this means decreased company payroll and tax liabilities for social security, Medicare, and unemployment. A Section 125 flexible spending account can save employers an average of almost $115 per participant in FICA payroll taxes – which can offset or be more than what you paid to start the plan.

With a Section 125 flexible spending account, employees can save an average of 30% in federal, state, and local taxes on items they already pay out-of- pocket.

On average, employees save from $.25 to $.49 for EVERY dollar they contribute to the FSA.

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