Have you heard the term “cafeteria plan” but aren’t sure what it is or whether it could save your business money? Then you’ve come to the right place.
A cafeteria plan is similar to a cafeteria in that you can make the selections you want for your employees but replace food with employee benefits. These benefits are available before payroll taxes and calculated from a pool of options offered by you, the employer.
What is a Section 125 Cafeteria Plan?
A Section 125 cafeteria plan allows employees to choose from a menu of pretax benefits, such as health insurance, dental or vision coverage, and flexible spending accounts (FSAs). The plan gets its name from Section 125 of the Internal Revenue Code, which permits these benefits to be tax-free. Employees can select the benefits that best suit their needs.
Cafeteria Plan Type Options
Premium Only Plan (POP)
A POP plan allows employees to pay for their share of health insurance premiums with pretax dollars. This reduces employees’ taxable income, allowing them to spend less on federal income, Social Security, and Medicare taxes.
Flexible Savings Arrangements (FSA)
An FSA allows employees to set aside pretax money for qualified healthcare or dependent care expenses. FSAs are part of Section 125 cafeteria plans, and contributions are typically deducted from an employee’s paycheck before taxes are applied.
Simple Cafeteria Plans
Established under the Affordable Care Act (ACA), a Simple Cafeteria Plan for small business owners to offer tax-advantaged benefits to employees without administrative burden and nondiscrimination testing required by traditional cafeteria plans. You can provide a simple cafeteria plan with fewer than 100 employees.
Full Flex Plans
Full Flex Plans are cafeteria plans that allow employees to choose from a broader range of benefits using employer-provided “flex credits.” These credits cover eligible benefits like health insurance, FSA, and life insurance. Employees can use them for full or partial coverage, paying the remainder of the costs pretax.
Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
This section 125(e) benefit allows small businesses with 50 or fewer employees to reimburse employees for medical expenses and health insurance premiums on a tax-free basis. Employers set a maximum annual reimbursement, providing a flexible, tax-advantaged way to support employee healthcare costs without offering a traditional group health plan.
Premium Reimbursement Arrangement (PRA)
PRAs are similar to POP, but they reimburse your employees for their share of health insurance premiums rather than paying the pretax dollars. They can also be used with other cafeteria plans for more flexibility.
Dependent Care Flexible Spending Account (DCFSA)
A DCFSA enables employees to set aside pretax dollars to pay for eligible dependent care expenses. These expenses can include after school and daycare for children under 13 and care for elderly family members.
A Section 125 plan doesn’t demand employee participation like other employee benefits. Your employees may opt not to exchange a portion of their taxable wages for tax-free benefits. Yet, this is still a great way to improve employee morale and engagement.
Benefits Included in a Section 125 Cafeteria Plan
If you’re considering a Section 125 Cafeteria Plan, there are a few benefits to keep in mind.
Group Health Benefits
Group health benefits offered in Section 125 plans include medical, dental, and vision coverage.
Accident and Disability Coverage
Some employers offer adoption benefits, which can be tax-free under a Section 125 plan.
Adoption Assistance
Some employers offer adoption benefits, which can be provided tax-free under a Section 125 plan.
Dependent Care Assistance
This is a common benefit under Cafeteria Plans, often through a Dependent Care Flexible Spending Account (FSA).
Group-term Life Insurance Coverage
Employers can offer this benefit, with premiums often paid on a pretax basis.
Health Savings Accounts (HSAs)
While not technically part of a Cafeteria Plan, HSAs can be offered alongside other benefits in a Cafeteria Plan setup, and contributions can be made on a pretax basis.
What’s NOT Included in Section 125 Plans?
Employers may still offer benefits that don’t meet Section 125 requirements. They just can’t be paid for with pretax dollars. Examples include, but are not limited to:
• Long-term care insurance
• Tuition assistance
• Employee discount programs
• Work cell phones
• Moving Expenses
• Commuter benefits
• Gym memberships
• Minimal or de minimis benefits
Participation Requirements for a Section 125 Plan
Does your company qualify to offer a Section 125 plan? Let’s examine the participation requirements.
Only employers can sponsor a Section 125 plan, which is typically available to eligible employees, spouses, and dependents.
Any company with employees subject to federal income taxes in the U.S. can sponsor a Section 125 plan, including:
• C Corporation
• S Corporation
• Limited Liability Company (LLC)
• Partnership
• Sole proprietorship
• Government entity
Who can’t participate in Section 125 plans?
• Self-employed individuals
• Partners within a partnership
• Shareholders who own more than 2% of a subchapter S corporation
What’s the Difference Between an HSA and a Cafeteria 125 Plan?
A Section 125 cafeteria plan can pay for covered healthcare expenses, including deductibles and insurance premiums. Still, your HSA can be used to save for future healthcare expenses.
How Much Does it Cost to Set Up A Cafeteria 125 Plan?
To set up a Section 125 plan, you may need to use cafeteria plan advisors or a tax advisor. Their fees vary widely, but costs can typically be between $100 and $600, depending on your third-party administrator (TPA), broker, or employee benefits consultant.
In general, the initial fee is small compared to the plan’s potential long-term savings. However, employee benefits specialists, like Primary Care Insurance Solutions, can be extremely beneficial should you need to adjust your plan, so keep that in mind.
Is a Cafeteria Plan Worth it For You?
Whether a cafeteria plan is right depends on what you and your employees need. However, the valuable tax benefits for employers and employees make them an easy choice for many companies.
Thanks to pretax contributions for health insurance, employers and employees can reduce their taxable income and save big on taxes every year.
If the upfront fee for setting up a 125 Cafeteria plan doesn’t deter you, this could be an excellent opportunity to expand what you offer your employees.
Need help exploring how this type of healthcare option could benefit your company? Curious about the cafeteria maximum and what that means for employees? Or do you just want to adjust your employee benefits? We can help with that.
Choose Primary Care Insurance Solutions to be your employee benefits consultant, and we’ll help you determine the best plan options for you and your employees. Get a quote today.
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