What is a Cafeteria Plan?
When it comes to taking advantage of the tax code and reducing an employee’s tax burn, few things are as effective as the Section 125 Cafeteria Plan.
Though it sounds more like something that employees would use on their lunch hour, this actually refers to a unique tax program that allows employees to deduct some expenses from their paychecks each week before taxes are taken out. As a result, the so-called “Cafeteria Plan” can reduce an employee’s taxable income, saving them between 25 cents and 49 cents per dollar on state and federal taxes on each paycheck. More disposable income for the employee means a greater ability to do everything from routine paying of bills to planning of vacations and much more.
A Quick Look at How it Works
The IRS developed Section 125 as a way to benefit employees who choose to initiate a Flexible Spending Account, or FSA. The money contributed to this spending account is considered tax exempt, up to a certain dollar amount, and all contributions to the account are taken out of an employee’s paycheck before their taxes are calculated. As a result, contributions into this FSA account reduce the employee’s taxable income and may adjust their tax bracket. This, in turn, means that the employee pays less in taxes despite earning the same amount of money and allocating the cost of their benefit programs a bit differently.
What is a Typical Day for a Benefits Manager?
Many employers will permit funds in the FSA to pay for healthcare expenses, transit or commuting benefit programs, and several other key benefits. This means that employees can transfer their savings on takes into their weekly commuting costs or routine health expenditures, which is a great way to reduce the cost of these more expensive workplace requirements. There is a cap on FSA contributions and tax exempt status, but most employees will find it hard to reach these limits in a typical year.
Key Benefits to Employees
Employees benefit by reducing their tax burden throughout the year, reducing their tax burden and increasing the amount of disposable income that they bring home during each pay period. The FSA is typically administered by the employer, which means that the employee won’t even have to think about the disbursement of their saved funds into benefit programs like TransitChek or health insurance policies. In essence, taking advantage of a this benefit is a “set it and forget it” alternative to more traditional allocation of income to workplace benefit programs.
Benefits to Employers When This Unique Plan is Chosen
The benefit of a this program to employers is primarily financial. Because employees are reducing their taxable income, the employer is also reducing their tax burden for each employee that enrolls in this program. As a result, employers will pay less in FUTA, SUTA, FICA, and Workers’ Compensation taxes, which can boost their own bottom line in a significant way. Another benefit is higher employee satisfaction rates. Employees effectively get a “raise” without an actual increase in their salary, and they feel more goodwill toward their employer as a result. This bodes well for employee turnover at most organizations.
A Great Way to Achieve Major Tax Savings
Employees and their employers are always looking for ways to minimize tax deductions from their compensation, and this plan is one major way to accomplish this goal. With a reduced tax burden, excellent benefit programs, and new choices for how to allocate funds in an FSA account, the Cafeteria Plan can help employees enjoy higher levels of pay while allowing their employer to minimize costs and employee turnover in a big way.
