Section 125 Cafeteria Plan ("FLEX")

A form of Cafeteria plans, also known as “flexible benefits plans”, under IRC §125, offers a proven way for employers to reduce taxes, manage and minimize dramatic increases in the cost of employee benefits while simultaneously improving their ability to meet the diverse benefit needs of their employees. §125 Cafeteria plans provide improved flexibility in benefit offerings at a modest cost. Employers seeking to contain the cost of benefits can adopt §125 Cafeteria plans to minimize the impact of cost increases to their employees and themselves.

Employers can meet all of these needs and realize significant gains with a §125 Cafeteria plan by using any of the following types of accounts:

  1. Premium Conversion Accounts that allow employees to pay group insurance premiums with pre-tax dollars (i.e. Health, dental, and vision insurance premiums).
  2. Health Care Flexible Spending Accounts that allow §213(d) healthcare expenses to be paid with pre-tax dollars (co-pays, deductibles, prescription drugs, etc.).
  3. Dependent Care Flexible Spending Accounts that allow the payment of child or dependent day care expenses with pre-tax dollars.

Employer Advantages:

  • Utilization of current tax laws can result in substantial benefit cost savings
  • Creates a system that efficiently allows employees to pay for certain benefits with pre-tax dollars
  • Allows greater flexibility in the choice of benefit offerings to all employees
  • Educates employees about provided benefits and provides an incentive to utilize them efficiently
  • Gives employees “ownership” of their coverage and provides for greater employee appreciation

Employee Advantages:

  • Reduces taxable income without reducing benefit coverage
  • Increases spendable income without reducing benefit coverage
  • Allows for pre-tax deductions for group insurance premiums (health, dental, vision), dependant care expenses, and even reimbursable healthcare expenses
  • Often creates greater choice & flexibility in available employer-provided benefits

Set-up and administrative costs of a §125 Cafeteria plan are modest and are generally more than offset by the tax savings realized. Therefore, such plans are economically feasible for even the smallest employers.