IRS Section 125: Cafeteria Plans Smart Benefits, Smarter Savings

Discover how the IRS Section 125 cafeteria plan empowers employees to choose benefits that fit their needs while saving on taxes. This smart benefits approach allows both employers and employees to enjoy greater flexibility and financial savings—making workplace compensation more efficient, strategic, and cost-effective for everyone.

1. IRS Section 125 Cafeteria
Plans: Smart Benefits,
Smarter Savings

2. Introduction to IRS Section 125
Cafeteria Plan
An irs section 125 cafeteria plan allows employees to pay
for qualified benefits like health insurance and dependent
care with pre-tax dollars. This powerful tool reduces taxable
income for employees and payroll taxes for employers,
creating significant savings and enhancing employee
compensation packages.
By leveraging pre-tax contributions, both parties unlock
substantial financial advantages while building a more
competitive benefits program.

3. What Is an IRS Section 125
Cafeteria Plan?
Written Plan Structure
Employer-sponsored formal plan
offering employees choice between
taxable benefits (cash) and qualified
benefits (health insurance, FSAs)
Pre-Tax Advantage
Enables pretax payroll deductions,
lowering employees' federal, state,
and FICA taxes significantly
Employer Savings
Employers save on payroll taxes like Social Security and federal unemployment
(FUTA)

4. Key Benefits for Employees and Employers
20-40%
Employee Tax Savings
Average savings on medical, dental, vision, and dependent care
expenses
7.65%
Employer Payroll Reduction
Reduced payroll tax liabilities per participating employee
Win-Win Advantages
Enhanced talent attraction and retention through
flexible benefits
Improved employee satisfaction and financial wellness
Competitive advantage in recruiting top talent
Reduced administrative burden with streamlined payroll

5. Common Types of Section 125 Plans
Premium Only Plans (POP)
Simplest option: Pre-tax deductions for group health
insurance premiums, reducing both employee and
employer tax burden immediately
Flexible Spending Accounts (FSA)
Pre-tax funds for medical and dependent care expenses,
subject to annual limits and "use-it-or-lose-it" rules with
possible grace periods
Simple Cafeteria Plans
Designed for employers with ≤100 employees, offering safe
harbor from complex nondiscrimination testing
requirements
Full-Flex Plans
Comprehensive approach: Employer contributions plus
employee pre-tax elections for a customizable menu of
qualified benefits

6. How to Set Up and Administer a
Section 125 Plan
Draft Written Plan Document
Create comprehensive documentation detailing benefits, eligibility
requirements, contribution rules, and administrative procedures
Perform Nondiscrimination Testing
Ensure plan fairness and compliance by testing that benefits don't favor highly
compensated employees
Choose Administration Method
Consider third-party administrators or integrated HR/payroll technology
platforms for efficient, accurate management
Maintain IRS Compliance
Follow all regulations to preserve tax-advantaged status and avoid deferred
compensation classification issues

7. Compliance and Important Considerations
Annual Election Requirements
Employees must make benefit elections annually; mid-year changes permitted only
for qualifying life events (marriage, birth, job change)
FSA Forfeiture Rules
Unused FSA funds typically forfeited at year-end unless employer offers grace period
or carryover option
Plan Structure Rules
Must offer at least one taxable benefit and one qualified benefit to meet cafeteria
plan definition
Documentation Standards
Maintain proper records and file required reports based on plan type and participant
count

8. Contact Us
Website: theharmonicare.com
Email: [email protected]
Phone: [phone]
Empower your business with smarter benefits and
smarter savings today!