Cafeteria Plan Authorized by Internal Revenue Code 125
 

  

By Installing a Cafeteria Plan Authorized by

Internal Revenue Code 125 it is possible to:

  • improve employee benefits without changing them

  • increase employee spend-able income

  • increase employer profits

Table Of Contents:

 

  
 

A Popular Benefit:

Cafeteria Plans are quickly becoming the most popular fringe benefit being offered to employees today. Since laws were passed by Congress permitting Cafeteria Plans over eighteen years ago, many major businesses have incorporated Cafeteria Plans into their

fringe benefit packages.

  • A Cafeteria Plan attracts and helps retain good employees

  • The company can help their employees significantly reduce their tax liability with a Cafeteria Plan.

  • An employer can also recognize significant tax savings

  • A Cafeteria Plan Does not require a change in already established fringe benefits.

  • The benefits resulting from a Cafeteria Plan are applicable to all business, large or small.

 

What is a Cafeteria Plan?

A Cafeteria Plan is a written document which allows participating employees to redirect qualifying expenses into “tax free” benefits. In most plans, eligible employees have the following options:

  • To continue receiving their normal compensation, or

  • To direct a portion of their salary to the Cafeteria Plan to pay for qualifying benefits (e.g., health insurance premiums, un-reimbursed medical expenses, or dependent care expenses) on a tax-free basis.

 

What benefits can my company include in the Cafeteria Plan?

Your plan can include all or any combination of the following:

  • Health insurance premiums (the employee’s portion).

  • Medical expenses not covered by insurance. Typical expenses include eyeglasses, annual physicals, plan deductible, and any co-insurance amounts not covered by the plan.

  •  Adult and child day care expenses (the cost to care for a dependent while the employee works, including pre-school up to but not including kindergarten).

  • Other insurance coverage, including group term life insurance premiums, individual or group dental, disability, cancer or accident premiums

 

How will your company save money?

Your company can recognize the following savings with a Cafeteria Plan:

  • FUTA and Social Security taxes will be avoided on the amounts redirected by the participating employees in the plan.

  • Insurance premiums based on your employees taxable salaries, such as workers’ compensation can be reduced.

 

 

Employer Savings Chart: How will the employer save money?

 

EMPLOYER SAVINGS

Based on 30 Employees, Average $2,000/mo. Salary

 

                                                          Before                  With

                                                       Cafeteria Plan       Cafeteria Plan

 Employee Salary                                 $2,000               $2,000

 

 Employee Cafeteria Contribution               0                     500

   

 Taxable Salary                                     2,000                  1,500

 

 FICA at 7.65%                                        153                     115

 

 Workers’ Comp (Average 5%)               100                       75

 

 Employee Payroll Cost                        2,253                  2,190

 

 Monthly per Employee Savings                                        $60

 Annual per Employee Savings                                        $756

First Year Savings with 30 Employees:                      $22,680

 

Employee Saving Chart: How will your employee save money?

 

EMPLOYEE SAVINGS                                   

                                                          Before                With

                                                       Cafeteria Plan    Cafeteria Plan

  Employee Salary                                  $2,000             $2,000

Tax Free Benefit Expenses                           0                      0

(Redirected from salary on pre-tax basis)

 

Taxable Income                                       2,000                  2,000

Taxes & FICA (Average 25%)                500                    375

Payroll Income                                        1,500                  1,125

Tax Free Benefit Expense Reimbursement  0                   500

Spendable Income                               $1,500                 $1,625

Employee Monthly Increase                                             $125

Annual Employee Increase w/o a Raise:                       $1,500  

30 Employees                                                                    $45,000