What is the difference between Section 125 and cafeteria plan?

What is the difference between Section 125 and cafeteria plan?

A cafeteria plan, also known as a section 125 plan, is a written plan that offers employees a choice between receiving their compensation in cash or as part of an employee benefit. Employer contributions toward an employee’s cafeteria-plan benefits are not taxed.

Is section 125 the same as FSA?

Flexible Spending Accounts (FSAs), governed by Internal Revenue Code (IRC) Section 125, allow you to have pre-tax payroll deductions for certain medical and dependent care expenses. Section 125 also permits your insurance premiums to be taken on a pre-tax basis.

Can owners participate in a Section 125 plan?

In general, most business owners are ineligible for participation in a Section 125 cafeteria plan (e.g., FSA, Commuter benefits) because these owners are considered self-employed individuals, rather than employees of the company. Only employees can participate in cafeteria plans.

Is 401k a Section 125 plan?

A 401(k) cafeteria plan allows employees who are participating in their employer’s 401(k) plan to also choose additional types of benefits from a smorgasbord of options on a pretax basis. These plans are sometimes referred to as Section 125 Plan (from the applicable IRS code) or a flexible benefits plan.

Is a cafeteria plan the same thing as a flexible spending account?

A Flexible Spending Account (FSA), sometimes referred to as a ‘Cafeteria Plan’ or ‘Section 125 Cafeteria Plan’, helps you keep more of your paycheck by reducing your Federal and state taxes. It allows you to pay certain expenses before taxes are deducted from your paycheck.

Are cafeteria plans taxable?

Generally, qualified benefits under a cafeteria plan are not subject to FICA, FUTA, Medicare tax, or income tax withholding. If an employee elects to receive cash instead of any qualified benefit, it is treated as wages subject to all employment taxes.

Can owners participate in an FSA?

Can owners or partners participate in an FSA? No. According to IRS guidelines, anyone with two percent or more ownership in a schedule S corporation, LLC, LLP, PC, sole proprietorship, or partnership may not participate.

Does section 125 reduce FICA?

For a business owner, a section 125 plan helps to reduce payroll and tax liabilities, including FICA and FUTA.

What are the rules for a section 125 plan?

The IRS has specific rules for which benefits you can include in a section 125 plan. IRS Publication 15-B details which benefits they do and do not allow in cafeteria plans. Generally, you cannot include a benefit that defers an employee’s pay.

Can a flexible spending account be used for Section 125?

Flexible spending account rules allow pre-tax deductions to be used to fund these expenses and can lead to significant amounts saved each quarter and each year. Only you can decide if and when it makes sense for your company to offer a section 125 plan to employees.

Do you need a section 125 health savings account?

Health Savings Account (HSA) If you decide your business will offer a section 125 plan, cafeteria plan, or HSA to its employees, you’ll need to include the plan(s) as part of your annual enrollment period, so that eligible employees may sign up, maximize the usage of your new benefits, and potentially save money on taxes.

Do you pay Futa on a section 125 plan?

Because section 125 plans are pre-tax, they also come out before federal unemployment tax (FUTA), reducing your employer FUTA liability per paycheck. The tax remains 6% (or 0.6% if you receive the credit) on the first $7,000 of an employee’s wages. However, the pre-tax deduction reduces the taxability of each check.