Frequently Asked Questions about Section 125 Plans:

Section 125 plans, commonly known as cafeteria plans, allow employees to choose between taxable income and certain qualified, non-taxable benefits, offering tax advantages to both employers and employees. These plans can include benefits such as health insurance, group-term life insurance, and flexible spending accounts.

What is a Section 125 Plan?

A Section 125 plan, or cafeteria plan, is an employer-sponsored benefits program that allows employees to pay for qualified benefits, such as health insurance premiums, on a pre-tax basis. This arrangement reduces both the employee’s and employer’s tax liabilities.

What types of benefits can be included in a Section 125 Plan?

Qualified benefits under a Section 125 plan may include health insurance, group-term life insurance, disability insurance, dental and vision insurance, and flexible spending accounts for healthcare and dependent care expenses.

How does a Section 125 Plan benefit employees?

Employees can pay for eligible benefits with pre-tax dollars, reducing their taxable income and increasing their take-home pay.

How does a Section 125 Plan benefit employers?

Employers can reduce their payroll taxes since employee contributions to the plan are made on a pre-tax basis, lowering the employer’s taxable payroll.

What is the difference between a Premium Only Plan (POP) and a full cafeteria plan?

A Premium Only Plan (POP) allows employees to pay their share of insurance premiums with pre-tax dollars. In contrast, a full cafeteria plan offers a broader range of pre-tax benefit options, such as flexible spending accounts and other qualified benefits.

Can any employer establish a Section 125 Plan?

Yes, employers of all sizes, including corporations, partnerships, non-profits, and government entities, can establish a Section 125 plan, provided they have employees who will participate in the plan.

Are there any restrictions on changing benefit elections within a Section 125 Plan?

Yes, employees generally cannot change their benefit elections until the next open enrollment period unless they experience a qualifying life event, such as marriage, divorce, birth or adoption of a child, or a significant change in employment status.

What are the compliance requirements for a Section 125 Plan?

Employers must have a written plan document outlining the benefits offered and comply with applicable nondiscrimination requirements to ensure the plan does not favor highly compensated employees.