A Section 125 plan is called a cafeteria plan. This plan allows employees to choose to withhold pre-tax salary to cover the cost of specific benefits, or to choose between taxable and non-taxable. These benefits can include health insurance, child care, adoption assistance, life insurance and health savings accounts.
There are a number of advantages to using a Section 125 plan for a business. The employees receive more take home pay, as their taxable income is decreased. The business also pays less in payroll taxes. Offering benefits under Section 125 can offer an employment package that is well suited to bringing in new employees. An employer must make a written plan that details the benefits that are offered, and distribute it to employees.
The requirement to file a Form 5500 for cafeteria plans has been mostly eliminated, but there are a few instances where these forms still need to be filed. A Section 125 plan that includes a welfare benefit plan with over 100 recipients still needs Form 5500 filed.
A Section 125 plan must give employees a choice between taxable and non-taxable benefits. A written plan that only contains taxable benefits is not eligible for cafeteria plan benefits. Employees, their spouses, and their dependents can receive these benefits. While the benefits are not taxed, they are required to be reported on an income tax form.
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