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How a Section 125 Cafeteria Plan Saves Employer Tax Dollars

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
Without Section
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%

Download the Core Documents Section 125 Cafeteria Plan Employer Guide HERE

Core Documents Section 125 Cafeteria Plan Employer Guide

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