When many employers hear the term “cafeteria plan,” they may think of arrangements with employer credits and complicated administration requirements.
In actuality, these plans are more prevalent than many may think.
A section 125 or "cafeteria" plan allows employees to withhold a portion of their pre-tax salary to cover certain medical or child-care expenses.
And because the pre-tax benefits aren't subject to federal social security withholding taxes, employers win by not having to pay FICA--or workers' comp premiums--on those dollars.
Cafeteria plans offer tax savings on the front end, because premiums for supplemental benefit policies can be paid on a pretax basis.
However, in some cases, pretax premiums can have an effect on taxation on the back end when benefits are paid.
The salary reduction amount is also excluded from wages for purposes of both the employer and employee shares of payroll taxes, including those from Social Security, Medicare, the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA).
Additionally, some employers use a cafeteria plan to offer more expansive benefits, including such things as health and dependent care spending accounts.
Aflac herein means American Family Life Assurance Company of Columbus and American Family Life Assurance Company of New York.
One of the most underrated and underused employee benefits available for small businesses today is outlined in section 125 of the U. Because these benefits are free from federal and state income taxes, an employee's taxable income is reduced, which increases the percentage of their take-home pay.