Code Section 125 allows employers to establish a type of tax savings arrangement, called a Section 125 plan or cafeteria plan, for their employees. A Section 125 plan provides employees with an opportunity to pay for certain benefits on a pre-tax basis, allowing them to increase their take-home pay.
What qualifies as a section 125 plan?
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. … Employee contributions toward cafeteria-plan benefits are made pre-tax.
What are considered Section 125 deductions?
In a section 125 plan or cafeteria plan, employees can pay qualified medical, dental, or dependent-care expenses on a pretax basis, which has the effect of reducing their taxable income as well as their employer’s Social Security (FICA) liability, federal income and unemployment taxes, and state unemployment taxes …
What does section 125 mean on a paycheck?
A Section 125 Plan is a written plan that gives employees the option to choose between cash and qualifying benefits that are pre-taxed. … The employee usually pays less in federal income and/or FICA taxes because the employee’s contribution is withheld before taxes.
Is 401k a Section 125 plan?
A 401(k) cafeteria plan allows employees who are participating in their employer’s 401(k) plan to also choose additional types of benefits from a smorgasbord of options on a pretax basis. … These plans are sometimes referred to as Section 125 Plan (from the applicable IRS code) or a flexible benefits plan.
Who is not eligible for Section 125 plan?
The Section 125 rules specifically prohibit the following individuals from participating: • Self-employed individuals; • Partners within a partnership; and • More than 2 percent shareholders in a subchapter S corporation (S corporation).
What is a premium only Section 125 plan?
A Section 125 premium-only-plan (POP), is a cafeteria plan which allows employees to pay their health insurance premiums with tax-free dollars. … Using a Section 125 POP to pay for insurance premiums benefits both employers and their employees.
Does Section 125 go on w2?
The total dependent care benefits the employer paid to the employee or incurred on the employee’s behalf (including amounts from a section 125 plan) should be reported in Box 10 of Form W-2.
Are Section 125 plans taxable?
A Section 125 plan is part of the IRS code that enables and allows employees to take taxable benefits, such as a cash salary, and convert them into nontaxable benefits. These benefits may be deducted from an employee’s paycheck before taxes are paid.
What is Cafe 125 on a w2?
You might be confused to see “Cafe 125” listed on your W-2 form. This may sound like it has something to do with where you go on your lunch break, but there is a more reasonable explanation. “Cafe 125” stands for IRS regulation code section 125 regarding tax-free cafeteria plans.
Is Section 125 Mandatory?
Income tax savings for the employee: A Sec. 125 plan is required for employers who want to allow employees to choose the qualified benefits they want and avoid paying income taxes on the amount of wages they contribute to obtain those benefits.
How much does it cost to set up a Section 125 plan?
Section 125 Plan Document package $99. The IRS requires a Section 125 Plan Document so that employees can pay for health premiums, FSA contributions, and other group benefits with tax-free payroll deductions.