Can Employers Save Taxes with a Section 125 Cafeteria Plan?

Posted by on Jun 29, 2012 in Section 125 Cafeteria Plans | 0 comments

Can Employers Save Taxes with a Section 125 Cafeteria Plan?


A cafeteria plan is a list of voluntary fringe benefits an employee can choose from. Generally, these benefits will have premiums, or costs, associated with them. The employee then elects to have monthly premium costs deducted from his or her paycheck. The employer then forwards these premiums each month to the benefits company.

The plans are named for the section of the Internal Revenue Code that allows employers to withhold these premiums from employees pay. The worker benefits because they gain access to valuable health and welfare benefits they would have a hard time getting into on their own. They also benefit because they can pay these premiums before their Social Security and Medicare contributions are calculated. Section 125 plan benefits are also free from federal and state taxes. The result is that employees are able to effectively buy these benefits at a discount – and are more likely to get the benefits they need to protect themselves and their families than if they were left to their own devices.

The employer benefits, too, because any premiums they withhold from employee paychecks are not subject to OASDI and Medicare tax. This saves the employer’s half of the tax contribution.

POPs – Premium Only Plans

In this simple form of Section 125, the employer simply reconfigures existing plans into a Cafeteria Plan – thus using tax savings from the reduction in payroll taxes to offset a portion of premiums the company may already be paying on employee’s behalf. These plans allow employers to mitigate increasing health insurance premium costs – with minimal administrative headaches, once the plan is set up.

Flexible Spending Accounts

These popular benefits – authorized by IRC Section 105 and 106, allow your employees to “set aside” money each pay check to spend on health care expenses. Benefits are tax free, and there is no payroll tax due on employee contributions to FSAs from either the employer or the employee. Once the plan is set up, then, these plans represent almost pure savings for the employer: The more employees participate in FSAs, and the higher their contributions, the lower the employer’s ultimate payroll tax bill will be.

Dependent Care Expense Plans

These plans are structured similarly to FSAs, above, except employers set aside contributions of up to $5,000 per year towards qualified dependent care costs.  These costs can include child care or day care for children under 13, day care for elderly dependents, or care for a disabled spouse or other dependent. The benefit also includes summer day camps. Employees ultimately save between 20 and 40 percent on these needed services.

If you have an ongoing 7.2 percent payroll tax on an employee who contributes the full $5,000, you, as the employer, save up to $360 per year per participating employee from a DCE plan alone. Additionally, employers benefit strongly from reduced absenteeism.

HDHPs/Health Savings Accounts

High Deductible Health Plan/Health Savings Account combinations are a proven way to reduce health insurance premiums. They also dovetail nicely with Section 125 plans, since it is easy for employees to route their HSA contributions through the Section 125 program, increasing the efficiency of the overall plan, and saving additional dollars off of the employer’s payroll tax bill.