|
Section 125 Cafeteria Plan Example
of Savings
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.)
EXAMPLE: An employer
with 20 participating employees, each contributing
$3,000 in pre-tax medical or insurance Cafeteria
Plan contributions annually.
| |
| Pre-tax
Cafeteria Plan contributions: |
$ 3,000 |
| Number
of employees: |
x 20 |
| Total
employee annual contributions: |
$60,000 |
| FICA
factor (Medicare & SS): |
x .0765 |
| Estimated
annual FICA savings alone: |
$ 4,590 |
|
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
125 |
Without
Section
125 |
| Monthly
gross pay: |
$3,200 |
$3,200 |
|
Pre-tax health insurance premium contribution:
|
500 |
0 |
|
Pre-tax out-of-pocket medical expenses:
|
200 |
0 |
|
Taxable monthly income: |
2,500 |
3,200 |
|
Applicable income taxes: |
625* |
928* |
|
After-tax insurance premium cost: |
0 |
500 |
|
After-tax unreimbursed medical cost: |
0 |
200 |
|
Net spendable income: |
1,875 |
1,572 |
| |
|
|
|
Increase in monthly spendable income: |
303 |
- |
|
Increase in annual spendable income: |
$3,636 |
- |
| |
|
|
*$30,000 ave. tax rate 25% | $38,400
ave. tax rate 29%
|
