What is a Cafeteria Plan?
A Cafeteria Plan, also known as a Section 125 plan, is a type of employee benefits program that allows workers to choose from a variety of pre-tax benefit options. Named after the idea of a “cafeteria-style” selection, these plans help employees reduce taxable income while enabling businesses to cut payroll taxes.
How Do Cafeteria Plans Work?
Under a cafeteria plan, employees can allocate a portion of their pre-tax earnings toward qualified benefits, rather than receiving the money as taxable income. This results in lower payroll taxes for businesses and increased take-home pay for employees.
Employer Benefits:
- Payroll tax savings: Employers save on FICA (Social Security and Medicare), FUTA (federal unemployment tax), and state unemployment taxes.
- Reduced taxable wages: Lower payroll expenses mean more cost-effective employee compensation.
- Enhanced employee retention: Offering tax-advantaged benefits can improve job satisfaction and reduce turnover.
Employee Benefits:
- Higher take-home pay: Less taxable income means employees pay less in federal, state, and payroll taxes.
- Pre-tax savings on key expenses: Health insurance, medical expenses, and dependent care can be covered tax-free.
- Flexibility to choose benefits that fit individual needs.
What Benefits Are Included in a Cafeteria Plan?
The IRS defines which benefits qualify under a Section 125 cafeteria plan. Some of the most common pre-tax benefits include:
1. Health Insurance Premiums
Employees can use pre-tax earnings to pay for:
- Medical, dental, and vision insurance
- Employer-sponsored group health plans
- Health Maintenance Organization (HMO) and Preferred Provider Organization (PPO) plans
2. Flexible Spending Accounts (FSAs)
Employees can contribute pre-tax funds for:
- Health FSAs: Cover medical, dental, vision, and prescription expenses.
- Dependent Care FSAs: Assist with daycare, preschool, and elder care expenses.
3. Health Savings Accounts (HSAs) Contributions
If enrolled in a high-deductible health plan (HDHP), employees can contribute pre-tax dollars to an HSA, which covers:
- Doctor visits and prescriptions
- Dental and vision care
- Long-term medical expenses
4. Dependent Care Assistance
Pre-tax income can be used for:
- Childcare and preschool
- After-school programs
- Elder care for dependent family members
5. Group Term Life Insurance (Up to $50,000)
Employers can offer group-term life insurance on a pre-tax basis, provided the coverage does not exceed $50,000.
6. Accident and Disability Insurance
Employees can pay pre-tax premiums for:
- Short-term and long-term disability insurance
- Accident insurance for injury-related medical expenses
7. Adoption Assistance
Section 125 plans can include pre-tax reimbursements for adoption-related costs like legal fees, court expenses, and adoption agency fees.
For a comprehensive list of covered benefits, read What’s Covered Under a Section 125 Plan?
What’s NOT Included in a Cafeteria Plan?
While cafeteria plans offer significant savings, certain benefits are not eligible for pre-tax treatment, including:
- Commuter benefits (covered under Section 132 instead)
- Educational assistance and tuition reimbursement
- Long-term disability insurance when paid by the employer
- Wellness programs and gym memberships
Are Cafeteria Plans IRS-Compliant?
Yes, but strict IRS regulations must be followed. To maintain compliance, cafeteria plans must:
- Be established through a formal written plan document
- Only offer pre-tax benefits allowed under IRS Section 125
- Adhere to nondiscrimination rules, ensuring high-income employees don’t benefit disproportionately
- Be administered correctly to avoid tax penalties
How HarmoniCare Ensures Compliance
HarmoniCare’s Preventative Care Management Program (PCMP) takes the guesswork out of compliance by:
- Providing a fully managed Section 125 solution
- Ensuring 100% IRS, ACA, and HIPAA compliance
- Integrating seamlessly with payroll providers like ADP, Paychex, and QuickBooks
FAQs
Can an employer offer a cafeteria plan without contributing to it?
Yes, employers are not required to contribute, but many choose to match certain benefits to encourage participation.
Can employees change their cafeteria plan elections mid-year?
Only if they experience a qualifying life event, such as marriage, childbirth, or job loss.
Do cafeteria plans require extensive administrative work?
Not with HarmoniCare’s fully managed PCMP solution, which ensures hassle-free implementation and compliance.
How does a cafeteria plan benefit employees financially?
By using pre-tax dollars, employees lower their taxable income, which means less money goes to taxes and more stays in their paycheck.
Ready to Maximize Savings and Employee Benefits?
Cafeteria plans are a cost-effective, tax-saving solution that benefits both employers and employees. With HarmoniCare’s fully managed approach, implementation is simple, compliant, and seamless.
See real-world examples of how companies save with Section 125
Website: https://www.harmonicare.com
Email: support@harmonicare.com