What is a Section 125 health insurance plan?
What is a Section 125 health insurance plan?
A cafeteria plan, also known as a section 125 plan, is a written plan that offers employees a choice between receiving their compensation in cash or as part of an employee benefit.
What benefits can be included in a cafeteria plan?
Qualified benefits include the following:
- Accident and health benefits (but not Archer medical savings accounts or long-term care insurance)
- Adoption assistance.
- Dependent care assistance.
- Group-term life insurance coverage.
- Health savings accounts, including distributions to pay long-term care services.
How do Section 125 plans work?
In a section 125 plan or cafeteria plan, employees can pay qualified medical, dental, or dependent-care expenses on a pretax basis, which has the effect of reducing their taxable income as well as their employer’s Social Security (FICA) liability, federal income and unemployment taxes, and state unemployment taxes …
How does a 125 Plan Work?
Essentially, a Section 125 cafeteria plan allows an employee to reduce the gross income amount used to calculate Federal, Social Security, and some State taxes. This amounts to a savings of between 25% and 40% of every dollar they contribute to the plan.
Why do I need a Section 125 plan?
Income tax savings for the employee: A Sec. 125 plan is required for employers who want to allow employees to choose the qualified benefits they want and avoid paying income taxes on the amount of wages they contribute to obtain those benefits.
Is a health savings account a Section 125 plan?
Employers may choose to make contributions to their employees’ HSAs as part of a Section 125 plan (also known as a “cafeteria plan” or a “salary reduction plan”). Employers gain greater savings by allowing their employees to contribute on a “pre-tax” basis to their own HSA via payroll deduction.
What is the difference between HSA and Section 125?
Unlike other Section 125 plan deferral elections which only allow annual changes, the law allows for changes to the HSA deferral election as frequently as monthly. Although frequent changes to the elections create a small administrative burden on the employer, the benefit to employees is significant.
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