What you need to know about a Section 125 Cafeteria plan

General Liability InsuranceA cafeteria plan is a separate written plan that is maintained by an employer for employees that meets the specific requirements and regulations of section 125 of the Internal Revenue Code. The section 125 plan provides employees an opportunity to receive certain benefits on a pretax basis.

A qualified benefit is a benefit that does not defer compensation and is excludable from an employee’s gross income under a specific provision of the Cafeteria 125 Code, without being subject to the principles of constructive receipt. Qualified benefits include the following:

  • Group-term life insurance coverage
  • Health savings accounts, including distributions to pay long-term care services
  • Accident and health benefits (but not long-term care insurance)
  • Dependent care assistance
  • Adoption assistance

The Cafeteria plan must specifically describe all benefits and establish rules for eligibility and elections.

A Cafeteria section 125 plan is the only means by which an employer can offer employees a choice between taxable and nontaxable benefits without the choice causing the benefits to become taxable. A plan offering only a choice between taxable benefits is not a section 125 plan.

How does a cafeteria section 125 plan work?

Employer contributions to the cafeteria section 125 plan are usually made pursuant to salary reduction agreements between the employer and the employee in which the employee agrees to contribute a portion of his or her salary on a pre-tax basis to pay for the qualified benefits. Salary reduction contributions are not actually or constructively received by the participant. Therefore, those contributions are not considered wages for federal income tax purposes

Who can receive benefits under a cafeteria plan?

The plan may make benefits available to employees, their spouses and dependents. It may also include coverage of former employees, but cannot exist primarily for them.

There is generally no filing requirement for a cafeteria plan

If a business only has a cafeteria plan, you are not required to file Form 5500 or Schedule F. However, if you have a welfare benefit plan, you may be required under Department of Labor regulations to file a return for that plan.

What is a flexible spending account arrangement?

A flexible spending arrangement (FSA) is a form of cafeteria plan benefit, funded by salary reduction, that reimburses employees for expenses incurred for certain qualified benefits. An FSA may be offered for dependent care assistance, adoption assistance, and medical care reimbursements.  The benefits are subject to an annual maximum and are subject to an annual “use-or-lose” rule.

What financial remuneration under a cafeteria plan is not subject to FICA, FUTA, Medicare tax or income tax withholding?

Qualified benefits under a cafeteria section 125 plan are not subject to FICA, FUTA, Medicare tax, or income tax withholding.  However, group-term life insurance that exceeds $50,000 of coverage is subject to social security and Medicare taxes, but not FUTA tax or income tax withholding, even when provided as a qualified benefit in a cafeteria plan.

QuoteBroker can assist your business establishing a complete section 125 Cafeteria plan or a simple Premium Only plan, aka POP plans. Call us today at (800) 783-0802


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