In payroll accounting terminolog a cafeteria plan, a section 125 plan, is a plan that allows employees to choose between receiving cash or taxable benefits versus certain qualified benefits that the law provides an exclusion from wages. As a rule cafeteria plans do not include deferred compensation however 401K benefits can be included in a cafeteria plan.
“Most plans today work as a salary reduction, deductions that are considered pre-tax deductions. Both employees and employers gain from this agreement. Employees see reduced taxable wages (gross income) as contributions are not subject to federal, state or social security payroll tax withholding. Employers in turn see a savings on employer contributions of FICA, FUTA and workers’ compensation insurance premiums.
Qualified cafeteria plan benefits can include dependent care assistance, adoption assistance, group term life insurance (including costs that cannot be excluded from wages), accident and health benefits (not including Archer MSAs or long term care insurance) and health savings account, HSAs (distributions from an HSA may be used to pay eligible long term care insurance premiums or qualified long-term care services).
For purposes of a cafeteria plan common-law employees, full-time insurance agents who are current statutory employees and leased employees who have provided services basically full time for at least one year under employer’s direction. Of course there are exceptions those exceptions are regarding S Corp Shareholders, plans favoring highly compensated employees and plans that favor key employees. Do not treat the benefit as a reduction in distributions to the S Corp Shareholders. The previous two situations above employers will include the value of taxable benefits the employees have selected in their wages.
Payroll Mate payroll accounting software allows users to add any type of income or deduction category that meets their needs. User-defined incomes and deductions support both taxable and pre-taxed categories therefore supporting Section 125 Cafeteria Plans.
Create a pre-tax deduction (Cafeteria plan) for yourself by downloading a free payroll software demo.