Many employers struggle with the challenge of providing an attractive compensation package at an affordable price. One tool available to meet this challenge is the Section 125 plan. Section 125 plans are also commonly referred to as cafeteria plans. While there are different types of Section 125 plans, each provides the opportunity to save money by reducing both the employer’s and employees’ tax liability. This article will outline for you the basics of offering a Section 125 plan.
What is a Section 125 plan?
A Section 125 plan may be established pursuant to rules found in the Internal Revenue Code Section 125. This IRC provision provides an exception to what is generally called the “constructive receipt doctrine.” Under the constructive receipt doctrine, offering an employee a choice between cash and an employee benefit requires that the amount that could have been received be included in the employee’s gross income.
A Section 125 plan allows employers to provide their employees with a choice between cash and certain qualified benefits without adverse tax consequences. Without a Section 125 plan, employee contributions can only be made with after tax dollars.
What are the different forms of Section 125 plans?
The three basic forms of Section 125 plans are:
- Premium Only Plan;
- Flexible Spending Account; and
- Full Cafeteria Plan.
For more information regarding Section 125 plans or for assistance deciding which Section 125 plan is right for you and your employees, please contact your LaPorte representative.