Overview

This article provides a brief overview of Section `125 (cafeteria) benefit plans.

Details

In general, a cafeteria plan as defined in Section 125 of the Internal Revenue Code (IRC) is a plan in which all participants are employees who choose from a minimum of two or more benefits that consist of cash and qualified benefits. The terms cafeteria plans, flexible benefit plans, and flex plans are used interchangeably.

Cafeteria plans benefit both employers and employees. Deductions and benefits that fall under the cafeteria plan reduce the employer's share of taxes because the wage reduction is not subject to Social Security, Medicare, and federal unemployment taxes (FUTA). In some cases, the benefits are exempt from federal income tax (FIT) and state income tax (SIT). This is a value to the employee because the benefit is not included in the gross income of a participant in a cafeteria plan under the provisions of specific sections of the IRC.

Flexible spending accounts or arrangements (FSAs) are often included in cafeteria plans. Such accounts provide a mechanism that allows employees to pay for certain medical and/or dependent care assistance expenses with pretax dollars.

The Section 125 plans supported by Online Payroll are:

  • Pretax insurance premiums (medical, dental, vision)
  • Dependent care (FSA)
  • Medical expense (FSA)

 

Summary Plan Description (SPD)

One of the most important documents participants are entitled to receive automatically when becoming a participant of an Employee Retirement Income Security Act (ERISA)-covered retirement or health benefit plan or a beneficiary receiving benefits under such a plan, is a summary of the plan, called the summary plan description or SPD.

Per the US Department of Labor and ERISA, employers are required to provide employees with an SPD that provides information on what the plan provides and how it operates. SPDs vary from provider to provider, and can be obtained from the provider itself. For more information on SPDs, see US DOL Health Plans & Benefits.