Why Your Business Needs a Full Section 125 Cafeteria Plan
Employers nationwide are learning how to offset high insurance rate increases
by reducing payroll taxes with Section 125 Cafeteria Plans. In many cases,
employer savings can add up to as much as 20 percent of every dollar being
passed through the plan.
One of the most underused employee benefits for small businesses today is
the Section 125 Cafeteria Plan. These plans simply allow employees to withhold a
portion of their salary on a pre-tax basis to cover the cost of qualifying
insurance premiums, medical expenses and dependent care expenses. Because
Section 125 Cafeteria Plan benefits are free from federal and state income tax,
an employee’s taxable income is reduced which increases their take-home pay. And
because the Section 125 Cafeteria Plan reduces employee gross income for
purposes of income tax, the employer also enjoys a reduction in their payroll
tax liability by eliminating matching FICA taxes of 7.65%, and possibly workers’
compensation (depending on your state).
In an environment where group health insurance continues to double in cost every
four years, it’s hard to understand why more employers don’t setup full Section
125 Cafeteria Plans. Employers don’t realize they can offset a good portion of
their insurance premium increases with reduced payroll tax liabilities. Seems
simple; and it really is. The reason more employers don’t take advantage of
Section 125 Cafeteria Plans is because they believe they’re too difficult to
setup or administer, most CPAs don’t really understand them or offer assistance,
and most Human Resource directors don’t know who to contact to set up a plan and
like CPAs, don’t really understand the concept.