Cafeteria Plans

"Cafeteria Plan" is the term used in Internal Revenue Code Section 125 which allows an employer to deduct employee contributions for certain benefits such as health, dental and vision premiums, on a pre-tax basis. Cafeteria plans are often referred to by other names, including Flexible Spending Accounts (FSA), Section 125 plans, and Health Reimbursement Accounts.

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The Section 125 Cafeteria Plan of the Internal Revenue Service (IRS) regulations allows an employer to deduct employee contributions for certain benefits on a pre-tax basis, such as health, dental and vision premiums. This reduces the amount of federal, state and local taxes you owe.

Section 125 Cafeteria Plans are one of the most underused employee benefits for small businesses today. Because the Section 125 Cafeteria Plan reduces employee gross income for purposes of income tax, the employer also enjoys a reduction in their payroll tax liability by eliminating matching FICA taxes of 7.65%, and possibly workers' compensation (depending on your state).

Healthcare expenses that qualify for reimbursement:

Accident and disability benefits (but not medical savings accounts or long-term care insurance)
Medical
Adoption Assistance Program
Dependent care assistance
Group-term life insurance coverage (including costs that cannot be excluded from wages)