Section 125
What is a Section 125 Cafeteria Plan?
A Cafeteria Plan is a type of employee benefit referenced under Section 125 of the Internal Revenue Code. The benefit of a Cafeteria Plan allows for health benefit contributions to be tax exempt for federal tax purposes. Health benefit contributions are deducted pre-tax from your gross salary thereby reducing the taxable income. The benefit of having taxable income reduced is beneficial and significant, however, it should be noted that reducing the taxable income will also reduce the amount of Social Security income reported.
If you currently waive all benefits (med/rx, dental & vision) there is no need to return the form.
Advantages - Increase your take-home pay by reducing your federal taxes. You will not have to pay federal income taxes, Medicare or Social Security taxes on money earned which is used to pay contributions or premiums.
Disadvantages - May reduce your Social Security wage base. For those employees approaching Social Security age, this may slightly affect your Social Security payments when you eventually collect them.
Purpose:
This agreement is designed for an employee to choose whether to convert a portion of their taxable income (health benefit contributions) to a tax-free benefit pursuant to Section 125 of the Internal Revenue Code.
Election Periods:
Section 125 enrollment periods run on a calendar year. Once you make an election you CANNOT change it for any reason during the course of the calendar year unless you have a qualified life event such as marriage, birth, divorce, or termination of employment. It is extremely important to consider your financial situation for the entire calendar year when making your Section 125 election.