Section 125 Cafeteria Plans: What Are They & How Can a PEO Help?

Too few employees today are taking advantage of one of the best options they have to save money while, at the same time, looking out for the health and well-being of themselves and their families. Section 125 Cafeteria Plans offer employees the opportunity to defer non-taxed income and use it instead on a wide range of medical procedures and over-the-counter purchases, both saving them money and ensuring financial stability when health issues arise.

Professional employer organizations (PEOs), third-party organizations specializing in human resources and employee management, can help businesses offer these benefits and assist in plan management.

Three Types of Section 125 Cafeteria Plans

Income deferred into a Section 125 plan reduces an employee’s discretionary take-home salary, but it is free from federal and state income and social security taxes. Employers avoid having to pay associated taxes, as well.

Such plans allow a range of pre-tax benefits:

1. Premium Only Plan (POP): Considered an essential element of the Section 125 Plan, POPs allow employees to convert taxable income into into non-taxable benefits. Employees can then pay certain premiums before taxes are deducted, saving them money on insurance benefits.
2. Federal Spending Account (FSA): With an FSA account, employees defer pre-tax earnings into an account medical care expenses. Employees often use it just like a checking account, while the cafeteria plan administrator provides reimbursement for qualified medical expenses.
3. Dependent Care FSA: Dependent Care FSAs allow employees to defer pre-tax dollars for child care, medical assistance for disabled spouse, medical assistance for aging parents, or any other dependents who are incapable of caring for themselves.

Organizations and Employees Both Benefit from Section 125 Cafeteria Plans

Section 125 Cafeteria Plans are mutually beneficial for organizations and their employees. Companies save in the form of reduced taxes and insurance. Employees receive immediate tax savings, as well; and employees whose medical needs are met are likely to be happier overall.

Such plans help to round out employee benefits packages. Employees are less burdened by health care insurance increases if their costs are filtered through an employer POP plan. Employers who may otherwise be tempted to cut back on health care benefits instead have the alternative of reducing their expenses through tax deductions.

Implementing Section 125 Cafeteria Plans: Things to Consider

Companies wishing to offer Section 125 Cafeteria Plans to their employees should follow the prescribed procedures for establishing their programs. The first step is creating a plan document, a binding legal instrument that delineates the program’s scope and procedures and detailing rules and eligibility requirements. In addition, businesses are required to craft a summary plan description (SPD) that must be distributed to all participants. Companies must then take an ongoing, active role in plan management and adherence to ongoing compliance requirements.

Small Businesses Turn to PEOs for Their 125 Plans

PEOs allow small and medium sized businesses to offer employees a robust range of benefits, including Section 125 plans. Companies considering a Section 125 Cafeteria Plan can benefit from partnering with a PEO, who can handle the responsibilities of creating a program plan, implementation schedule, documentation framework and compliance strategy. Many small businesses have not yet gained the expertise to create and run such a plan themselves. In the interim, outsourcing to a PEO to augment their own efforts can save them time and money, as well as give them an opportunity to learn how to operate new benefits plans from trusted advisors.

If you’re considering a Section 125 Cafeteria Plan, we’d like to hear from you. UniqueHR offers services throughout the U.S. to help businesses operate efficiently and grow.