What is a Section 125 Plan?

By hrlineup | 17.12.2019

When it comes to taxes, there are always considerable evolution to plans to best meet the needs of the state, employers and employees. With taxes, saving and paying less is typically a key motivation when considering a plan. One such plan is the Section 125 plan, which is also known as the Cafeteria Plan, has been in existence since 1978.

Why compare this plan to a cafeteria? Well, imagine a buffet with a range of different foods that you can choose from. You then pick what you fancy and have a meal. This plan gives employees the chance to do the same, pick and choose the benefits that apply to them.

What is sec 125 on paycheck?

As a pre-tax benefit, the sec 125 on paycheck refers to the agreement between an employer and employee on which benefits they want considered with this plan. Employees are able to use the Section 125 Plan to convert their taxable benefits into non-taxable benefits. Rather than receiving these benefits as cash, they are instead received as pre-tax benefits.

This type of a plan may be explored by employees who have some expenses which they meet regularly, such as childcare or medical expenses. This means that in addition to the employee benefiting, all of their immediate family members or dependents can benefit as well.  There are a host of other benefits including: –

  • Adoption Assistance
  • Accident and health benefits
  • Dependent care assistance
  • Some life insurance options

There are also some expenses, particularly medical, which can be reimbursed when someone has a Section 125 plan. These include: –

  • Fertility treatments
  • Dental fees
  • Acupuncture
  • Hearing Aids
  • Psychiatric care and more.

Although this plan does not offer full medical insurance, it allows one to amplify their insurance plans and include additional services in the most cost-effective way.

It is worth noting that an employee can request for their benefit to be given to them in cash. If they choose to go with this option, then the cash that they receive will be taxed.

How the section 125 tax deduction is made

This tax is deducted directly from the employee’s earnings before any withholding taxes are charged. Choosing this option brings down the total amount of income that is taxable. Most employees are able to save around 30% of taxes, being a combination of local, state and federal taxes. The motivation for employers is the chance to save on their Federal Insurance Contributions Act tax, as well as on insurance premiums. More than $100 can be saved for each employee that has chosen the section 125 plan.

Section 125 taxability allows employees to enjoy significant savings from their tax liabilities. S 125 payroll deductions are made before taxes are removed from the pay checks. Employers are responsible for the creation of these plans and continue to do so due to their appeal to employees. In some circles, it is said that employees prefer working for companies that offer more benefits, than those that offer higher pay.