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Section 125 Cafeteria Plans Can Lower The Cost Of Health Insurance

Both employers and employees can save money on health insurance by taking advantage of the tax benefits of Cafeteria Plans authorized by Section 125 of the Internal Revenue Code. Under Section 125, an employer can set up a cafeteria plan that allows employees to pay for health insurance premiums rather than taking the same money as cash (in the form of salary or wages).

Section 125 Employee Calculator

Section 125 Employer Calculator

Employees pay for health insurance premiums in pre-tax dollars. Since the money used to pay the premiums is not subject to federal, state, or city income taxes or FICA taxes, employees pay less in taxes and these savings can be used to lower the cost of health insurance. Employers also save money if an employee elects to pay for insurance premiums under a cafeteria plan, because an employer then does not have to pay the employer's 7.65% share of FICA payroll taxes on the money used by the employee to pay the insurance premiums.

This type of cafeteria plan is referred to as a Premium Only Plan (POP), because it can only be used to pay for premiums for accident or health care insurance coverage, including medical, dental, and vision, but cannot be used to pay for other medical expenses. Other types of qualified benefits, such as out of pocket medical expenses not reimbursed by insurance (for example, expenses paid before meeting a plan's deductible), can similarly be paid for with pre-tax dollars if an employer sets up a Flexible Spending Account (FSA), another type of cafeteria plan.

For more detailed information about cafeteria plans and their benefits, please click here to view our Frequently Asked Questions.


NOTE: Please note that this information is meant to be used for a general overview of Section 125. Any individual wishing to set up a plan should consult their tax advisor. Further, to ensure compliance with requirements imposed by U.S. Treasury Regulations, we inform you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
  

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