Section 125 is part of the IRS Code that allows employees to convert a taxable cash benefit (i.e., salary) into non-taxable benefits. Under a Section 125 Cafeteria Plan you can elect to pay for qualified benefit premiums before any taxes are deducted from employee paychecks (e.g., premium only plan, FSA, HSA, etc).
What is a Section 125 Plan?
A Section 125 “Cafeteria Plan” is a written document maintained by an employer where the participants of the plan can receive benefits on a pre-tax basis via salary reduction.
Eligible benefits plans include Premium-Only Plans (POP), Flexible Spending Account (FSA), Healthcare Reimbursement Account (HRA), Dependent Reimbursement Accounts (DRA) and of course a Health Savings Account (HSA).
Section125 Plan Rules
- The section 125 plan must describe, in detail, all the benefits elections rules and eligibility.
- All benefits outlined in the section 125 plan must be available to all eligible employees, their spouses, and dependents. It can also include benefits for former employers, but this can’t be the primary use case.
Section 125 HSA Contribution Details
Section 125 plans dictate HSA contributions. Specifically, if employers and employees can make pre-tax HSA contributions. You can read the full details including corporate legal structure here, but we have outlined the HSA contribution details as they relate to a Section 125 plan below.
While a Section 125 Cafeteria Plan is not a benefits plan, it does create the rules and regulations for employer and employee benefits. With or without a Section 125 Cafeteria Plan, employers and employees can make HSA contributions. A Section 125 Cafeteria Plan allows for pre-tax HSA contributions. Use a Section 125 Cafeteria Plan to save more (pre-tax) money with an HSA.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.