Reducing tax liability and allowing employees the freedom to manage health care costs is an attractive and important employee benefit. Cafeteria plans are employee benefit programs utilizing Section 125 of the Internal Revenue Code which allows employees to use funds set aside on a pre-tax basis to pay for certain qualified expenses from a menu of choices.
Compensation that has been redirected into a cafeteria plan is exempt from Federal, State, or Social Security taxes thereby reducing the employee’s taxable income and increasing their take home pay. Not only do employees save but most employers will find that the tax savings they experience offsets any administration costs to provide the plan. A cafeteria plan “menu” of options can include all three key levels of benefits or some combination of the three:
In addition to paying premiums with pre-tax dollars, an employer may also offer employees the ability to redirect a portion of their salary up to a pre-set limit into a flexible spending account. These pre-tax funds can be used to pay certain qualified expenses not covered by insurance including but not limited to insurance co-pays, insurance deductibles, vision expenses and dental expenses.