A cafeteria plan, also referred to as a Section 125 plan or flexible benefits plan, is a worker benefit plan that enables them to choose from a variation of pre-tax benefits. Workers can contribute a part of their total income before any taxes are determined and deducted.
How Cafeteria Plans Work
The program gets its name from a cafeteria, but the funny thing is that it has nothing to do with food. The way people select food in a cafeteria, in the same way, workers can determine the privileges of their choice before payroll taxes are estimated from a pool of alternatives offered by their organizations. These programs become more useful as heterogeneity within the workforces continues to develop and workers seek more personalized advantages that are tailored according to their requirements.
Cafeteria plan selections incorporate insurance options like HSAs (health savings accounts) contributions, disability insurance, and group term life insurance. Other popular selections incorporate adoption assistance plans, cash benefits, and flexible spending accounts.
Cafeteria plan selections enable workers to tailor a cafeteria plan according to their specific requirements. For instance, the best selection for a worker reaching retirement can be to make contributions to their 401(k) plan, while a worker with a big family may go for a health plan with broad coverage.
The cafeteria plan or Section 125 of the IRC (Internal Revenue Code) specifies that cafeteria plans are excluded from the calculation of total income for federal income tax plans. No Social Security or federal taxes are deducted. But, some benefits of the cafeteria plan such as the group life insurance benefits that surpass $50,000 require organizations to withhold both Medicare and Social Security taxes.
Workers must determine the amount of money they are going to provide to the flexible plan before the tax year begins. The chosen amount of money is distributed by the number of payroll duration and subtracted from every paycheck for the duration of the plan.
The funds allotted but not spent by the worker are relinquished. The individualized structure of cafeteria plans makes them complicated and time-consuming to manage. Organizations must maintain regular communication with each worker regarding the changes in the value of benefits, their coverage, and the use of benefits.
The cafeteria plan shaves off the tax liability of an individual. By offering pre-tax contributions to the program, workers reduce their total income from which payroll taxes are subtracted.
To know more about Section 125, the cafeteria plan, attend the Compliance Prime webinar.