Section 125 Plans
Section 125 is a section of the Internal Revenue Code that allows employees to earmark pre-tax dollars toward payment of Insurance Premiums, Medical Care, and Dependent Care expenses. The dollars used for this purpose are not subject to Social Security, Federal, or most State taxes. In effect, section 125 permits the employee to increase their net income by using dollars before they are taxed.
Sometimes referred to as a cafeteria plan, flex plan, or a Section 125 plan, a Flexible Savings Account (FSA) lets you set aside a certain amount of your paycheck into an account — before paying income taxes. During the year, you have access to this account for reimbursement of expenses — not covered by insurance — that you regularly pay for.
Benefit to the Employer
The salary dollars employees direct to a Section 125 Benefit Plan reduce employer payroll tax costs, as those dollars are not subject to the employer Social Security contribution. In addition, lowering payroll can result in reduced Federal and/or State Unemployment Tax contributions and Workers' Compensation premiums.
- Reduce employer payroll tax costs
- Reduce Federal and/or State Unemployment Tax contributions
- Reduce Workers' Compensation premiums