Cafeteria Plan Savings for Employers

Cafeteria Plans, also known as Section 125 plans, allow businesses to save Social Security (FICA), as well as federal unemployment taxes (FUTA) and generally, state unemployment taxes, on the money employees contribute to their premiums. Employer tax savings can average 7 to 10 percent of employees’ Cafeteria Plan contributions. (A tax advisor should be consulted for information on individual state regulations.)

Cafeteria Plan Savings for Employees

Insurance premium contributions and out-of-pocket medical expenses are automatically deducted from employee paycheck before income taxes are taken out. Because their taxable income is reduced by the amount they contribute, employees pay less taxes on the money they earn. Because of the Cafeteria Plan employees see a savings in their FICA, federal, and, in most cases state income taxes. When employees become more aware of how they spend money on benefit items, they also tend to practice more cost-containment, resulting in savings for everyone.

Example of Employee Savings using a Cafeteria Plan:

Notice Cafeteria Plan deductions are taken before taxes are calculated moving this employee into a lower tax bracket.With Section 125Without Section 125
Monthly Gross Pay$3,200$3,200
Pre-tax health insurance premium contribution5000
Pre-tax out of pocket medical expenses2000
Taxable monthly income25003200
Applicable income taxes625*928*
After-tax insurance premium cost0500
After-tax unreimbursed medical cost0200
Net spendable income18751572
Increase in monthly spendable income303
Increase in annual spendable income$3,636
*$30,000 ave. tax rate 25% | $38,400 ave. tax rate 29%

Want more money in your paycheck?

Would you like to increase your spendable income and enhance your benefits? A premium-only plan (POP), available through your employer, lets you choose the benefits that best fit your needs and pay for them with pre-tax dollars. Your POP contributions will be deducted from your gross earnings — before payroll taxes are taken out. This typically reduces the taxes you pay, which can help increase your paycheck. You could use the increased take-home pay to add more benefits during enrollment to give you more financial protection.

How do I get started?

Your partner at Altitude Benefits & Consulting will explain your options in simple, straightforward terms, so you can determine what’s right for you and your family. Your benefits counselor can also assist you with the necessary paperwork.

When can I enroll/change my election in this plan?

You can enroll or change an election only during your company’s eligible enrollment period, unless you experience a change in your:

  • Marital status
  • Number of dependents
  • Employment status
  • Place of residence
  • Dependent eligibility requirements

Keep in mind the election must be related to the status change. For example, Mary has a baby during the plan year. She can add the new baby to her coverage because the baby is a new dependent, which is considered a status change. But if Mary decided she wanted to add her husband, she would have to wait until the next eligible enrollment period, because that would not be considered a status change.