Section 125 Cafeteria Plans

What is a section 125 plan? 

A section 125 plan, often referred to as a cafeteria plan or POP plan, provides a means for employers to create a tax savings arrangement for their employees to pay for certain benefits on a pre-tax basis. This arrangement increases the employee’s take home pay, reduces the employee’s taxable income, and therefore, also reduces the employer’s tax liability. Section 125 plans must comply with certain rules and regulations under the Internal Revenue Code. 

What are the legal requirements? 

A Section 125 plan is the most popular means by which an employer can offer employees a choice between taxable and nontaxable benefits without causing adverse tax consequences to the employees. To avoid benefit taxation, the Section 125 plan must meet the specific requirements of Code Section 125 and underlying IRS regulations, including:
• Maintain a written plan document on or before first day of plan year;
• Only common law employees may participate on pre-tax basis;
• Elections are generally irrevocable for entire plan year; with exceptions for change in status events
• Plan must pass certain nondiscrimination tests to ensure it does not favor highly compensated employees.

What are the different types of section 125 plans?

Premium Only Plan (POP)
• Allows employees to pay their portion of premiums for qualified benefits with pre-tax dollars.
• Also offers cash out options for employees who decline insurance coverage.
Flexible Spending Arrangement 
• Allows employees to purchase benefits under a flexible spending arrangement (health FSA,  DCAP or both) on a pre- tax basis.
• May also incorporate premium payments or just use for flexible spending arrangement.
Full Cafeteria Plan
• Employers make contributions for employees to spend on benefits offered within the cafeteria plan.
• Employee may also contribute pre-tax dollars to purchase additional benefits beyond their purchase with the employer contribution.

Simple Cafeteria Plan
• Plan for eligible small employers (100 or fewer employees). 
• Must meet certain contribution, eligibility, and participation requirements.

So who needs a section 125 plan? 

Reach out to OneDigital to find out. 

Contact Ryan Schweizer at rschweizer@onedigital.com or 214-389-9661.