A Section 125 Cafeteria Plan allows employees to withhold a portion of their salary on a pre-tax basis to cover the cost of group health insurance premiums or qualifying supplemental benefit premiums that are part of an employer-sponsored plan, Health Flexible Spending Account (FSA) and/or Dependent Care FSA. You may set up the plan to include just the premium-only plan or all three components.
Section 125 Cafeteria Plan benefits are free from federal and state income tax, which reduces an employee’s taxable income, and the employer also enjoys a reduction in their payroll tax liability.
To be able to withhold any deferrals from an employee’s paycheck, you must have the proper documentation in place. Section 125 of the IRS code requires an employer have a written plan document in place regardless if your plan will cover one or 1,000 employees.
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