Section 125 Plans
What is a Section 125 Plan?
Authorized by the Internal Revenue Service, Section 125 Plans, commonly referred to as Cafeteria Plans, are benefit programs that allow employees to use pre-tax dollars to pay for certain expenses. Common components of a Flexible Benefits Plan include Premium Conversion and Flexible Spending Accounts.
How do Employees Save?
By using pre-tax dollars to pay for certain benefits, employees reduce their taxable income, resulting in more spending dollars. Contributions are not subject to Federal, State*, Social Security and Medicare taxes.
* New Jersey requires residents to pay state taxes on all contributions and Pennsylvania requires residents to pay taxes on Dependent Care FSA withholdings.
Employers also save!
All pre-tax withholdings are not subject to matching Medicare and FICA (Social Security) taxes. It is very common that the Employer savings will offset any administrative costs.
How do you establish and maintain a Plan?
In order for you and your employees to begin saving you must have a written plan document in place. In addition, you are required to provide each employee with a Plan Summary. A Plan Summary is a summary of the Plan Document. In the case where a Medical FSA is offered you must provide each employee with a Summary Plan Description (SPD). Annually, you must pass non-discrimination testing to remain in compliance with Plan requirements.
Who can have a plan?
Any type of an employer can offer a Flexible Benefits Plan to its employees. However, 2% or more owners of an S-Corporation, Partners in a partnership and Sole Proprietors are not eligible to participate in their company's plan.
Do you have to file a tax return?
The IRS no longer requires a Form 5500 to be filed for a Cafeteria Plan. However, if you have over 100 participants on the first day of a plan year in your MFSA or any other Welfare Benefit Plan (i.e., Medical, Dental, Vision, Life, DI, EAP), you may have to file a Form 5500 return for these benefits. HFS can assist you with the preparation of this return.