What Is Section 125 Plan

A section 125 plan is the only means by which an employer can offer employees a choice between taxable and nontaxable benefits without the choice causing the benefits to become taxable.

What is section 125 plan. In the context of section 125 pre tax means that a deduction is exempt from federal income tax withholding social security and medicare taxes. Employees their spouses and dependents can all benefit from section 125 plans. A section 125 plan document outlines specific details such as a description of the employee benefits that are covered through the plan and what they cost.

Employees receive benefits as pre tax deductions. With pre tax benefits you deduct the employee s contribution before you withhold taxes reducing their taxable income. These benefits may be.

A 125 cafeteria plan is a written plan that allows employees to elect between permitted taxable benefits such as cash and certain qualified benefits. A cafeteria plan is a type of employee benefit plan offered in the united states pursuant to section 125 of the internal revenue code. Section 125 plans section 125 plans from paychex can save money for your company and employees a section 125 premium only plan pop and flexible spending account fsa also known as cafeteria plans can reduce fica federal and state and local taxes for your company and employees when combined with your company s group health insurance.

A cafeteria plan also known as a section 125 plan is a written plan that offers employees a choice between receiving their compensation in cash or as part of an employee benefit. A section 125 plan is part of the irs code that enables and allows employees to take taxable benefits such as a cash salary and convert them into nontaxable benefits. It also includes participation rules annual limits and election procedures like what constitutes a qualifying event such as a spouse s job loss or a move.

A plan offering only a choice between taxable benefits is not a section 125 plan. Section 125 is a written plan that lets employees choose between qualifying benefits and cash. Its name comes from the earliest such plans that allowed employees to choose between different types of benefits similar to the ability of a customer to choose among available items in a cafeteria.

Section 125 is the section of the irs tax code where the items that can be deducted from employee pay on a pre tax basis are defined.