A Cafeteria Plan is an employee benefits programs designed to take advantage of the Section 125 Internal Revenue Code. Cafeteria Plans allow employees to pay qualified expenses on a pre-tax basis as the funds they contribute to the plan are not subject to federal, state or social security taxes. This results in lower taxable income overall which increases take-home pay. There are two types of Cafeteria Plans.
Premium Only Plan (POP)
Employers may deduct the employee's portion of the insurance premium directly from their paycheck prior to taxes being deducted.
Flexible Spending Accounts (FSA)
In FSA’s employees are able to set aside a pre-determined amount of money on a pre-tax basis per year. These funds then may be used to pay for eligible medical, dependent care, or transportation expenses.
Why Implement A Cafeteria Plan?
Benefits to Employers and Employees
Employers choose cafeteria plans such as the FSA to enhance their overall benefits package. Flexible Savings Plans offer tax advantage to the employer through reduced federal, state and workers compensation taxes on employees who choose to participate.
The tax savings recognized reduce or entirely eliminate the costs of offering the plan while at the same time create a “raise in pay” for participating employees.