Section 125 cafeteria plan
A Section 125 cafeteria plan is an IRS-governed plan framework that can allow employees to elect qualifying benefits on a pre-tax basis.
The qualifying benefits are most often health premiums, health flexible spending accountFSA (Flexible Spending Account). A flexible spending account (FSA) is a benefit that may be offered through a Section 125 cafeteria plan and is funded by payroll election.Click to open the term elections, and dependent-care benefits. Without a written Section 125 plan in place, those elections come out after tax, whatever the payroll system calls the deduction code. Election irrevocability is the trade for the tax treatment. An employee generally keeps an election for the plan year unless a permitted change event occurs. Nondiscrimination testing applies: a plan that favors highly compensated or key employees can lose the pre-tax treatment for that group.
Which wage bases does a Section 125 deduction reduce?
An incorrect pre-tax flag distorts several wage bases at once, surfacing on Form W-2Form W-2. Form W-2 is the annual wage and tax statement you give employees and file with the Social Security Administration, reporting wages paid and taxes withheld.Click to open the term, quarterly returns, and unemployment reporting together. State law controls the state side, so check the unemployment rule and the income-tax rule separately. Lower Social Security wages can mean a slightly lower future benefit. State paid family and medical leavePaid family and medical leave (PFML). Paid family and medical leave (PFML) is a state program replacing part of an employee’s wages during family or medical leave, funded through payroll contributions.Click to open the term contributions are separate payroll program items, not Section 125 deductions.
| WAGE BASE | QUALIFIED SECTION 125 AMOUNTS |
|---|---|
| Federal income tax | Commonly reduce it |
| Social Security and Medicare | Commonly reduce them |
| FUTA | Commonly reduce it |
| State income tax | Reduce it in many states |
| State unemployment | May follow a different rule than state income tax |
General information, not legal or tax advice. Apply current federal and state rules with qualified guidance.