Wondering what is a Cafeteria Plan and how it works? Commonly known as a Section 125 Cafeteria plan, is a section in the IRS code that allows an employer to provide a benefits to their employees which allows them to contribute a specific dollar amount of their gross income to a designated Cafeteria plan account, pre-tax. This account can then be utilized by the employee to pay for their insurance premiums pre-tax or reimburse the employee for dependent care expenses during the plan year or for the 'claim period' that an employee incurs unreimbursed, qualified expenses. The Cafeteria plan document should outline which expenses are considered 'qualified' and can be paid from the Cafeteria plan account on a pre-tax basis.
Basically, a Cafeteria plan allows an employee to lower their gross income, thus lowering the amount they pay in Federal, Social Security and some State taxes. The tax savings for an employee participating in a Cafeteria plan can range from 27% - 40%. The employer also saves on their FICA withholding tax for each employee participating in the plan. This can amount to 7.65% saved on pre-tax income contributed by the employee in addition to other savings such as Workers Compensation with lower payroll amounts.
Contact your employer or HR department about Cafeteria plans and if they are offered at your place of employment. It can save both the employee and employer valuable tax dollars that they can keep in their pockets and realize a higher net paycheck.
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