Section 125 Cafeteria Plans.

Nixon & Lindstrom can help guide you with the complexities of a Section 125 cafeteria plan. Employers should consider setting up Section 125 cafeteria plans to help employees reduce their taxable income.

What is a section 125 cafeteria plan and how does it work?

Created in 1978, employer-sponsored Section 125 cafeteria plans—also called flexible benefits plans—are available to employees, as well as their spouses and dependents. They fall under Section 125 of the IRS tax code, which allows employees to convert a taxable benefit like their salary into a nontaxable benefit. Employees essentially agree to earmark a portion of their pay for qualified benefits, thereby avoiding federal income taxes. Nixon & Lindstrom Insurance has helped businesses throughout Springfield and southwest Missouri set up Section 125 plans and help employees reduce their taxable income. Request a quote today for pricing and details.

Should my business offer a Section 125 cafeteria plan?

If flexibility is one of your top priorities when building a benefits and compensation package, you may want to consider offering a Section 125 cafeteria plan to your employees. As its name suggests, this plan includes a menu of benefits employees can choose from and pay for with pre-tax earnings.

Through Section 125 plans, employees may use their pre-tax earnings to pay for health, dental, or vision insurance plans, group term life insurance, or a health savings or flexible spending account. With FSAs, employees can set aside an established amount of pre-tax income each year under IRS rules to pay for medical or dependent care expenses. However, these funds must be spent during the plan year, so they’re ideal for employees with ongoing medical or childcare expenses.

Section 125 plans also offer tax savings for employers who aren’t required to pay Social Security and Medicare taxes on wages converted into nontaxable benefits. Any employer with employees subject to U.S. income taxes may sponsor a cafeteria plan. That includes C corporations, S corporations, limited liability companies, partnerships, governmental entities, and sole proprietorships.

Employers pay the fees to set up cafeteria plans, but it’s important to remember they typically recoup their investment over time through tax savings. Section 125 plans also help businesses control costs by ensuring money isn’t spent on benefits that employees don’t want or need.

What’s the next step for setting up a Section 125 plan?

Each cafeteria plan is governed by a written plan document and an adoption agreement that outlines the specific employee benefits. Once those documents are in place, many employers opt to contract with a third-party administrator that implements the plan, processes claims, and manages day-to-day operations. Doing so comes at an extra cost but can be money well spent for smaller businesses with limited resources.

If your business is ready to move forward with a Section 125 cafeteria plan, contact Nixon & Lindstrom to start mapping out the details. Whether you’re a small or large business, our experienced agents can help you put together the proper documentation and introduce the cafeteria plan to your employees.