Section 125

Section 125

Section 125 of the Internal Revenue Code allows for the creation of a reimbursement mechanism allowing employees to contribute a portion of their income into one or more accounts on a pretax basis.  These pretax funds can then be used to pay for insurance premiums, medical expenses, dependent care expenses or transportation and parking expenses not covered by insurance.

Section 125 “Cafeteria Plans” are a benefit to both employees and employers:

Employees Benefit – Employees are able to pay eligible expenses on a pretax basis saving anywhere from 25% to 50% in Federal, State and FICA (Social Security) taxes.

Employer Benefit – Employers are able to reduce their employees’ gross income, reducing the amount the company pays in Federal Insurance Contributions Act (FICA or Social Security), Federal Unemployment Tax Act (FUTA), Workers’ Compensation and some State taxes.

The employer may make further contributions to the plan (in addition to an employee’s own salary reductions) which employees may also use to purchase allowable benefits. Allowable benefits include:
a. dependent care assistance programs (daycare)
b. uninsured medical and dental expenses
c. group medical, dental, disability, and life insurance premiums

Because cafeteria plans allow employees to choose the benefits they want, they are often referred to as flexible spending accounts or flexible benefit plans.