Section 125-the Cafeteria Plan
- Companies enjoy lower Social Security payroll taxes while increasing employee net income.
- Allows Employees to pay for medical insurance premiums, unreimbursed medical expenses and
dependent care costs with “Before Tax Dollars”.
- Win-Win opportunity for Employers and Employees.
Example: Employer and Employee Benefits from a Typical Cafeteria Section 125 Plan
Employee
| Without Plan | With Plan | Increase | |
| Gross Monthly Pay | $2,500.00 | $2,500.00 | |
| Medical Insurance Premiums | $0.00 | ($100.00) | |
| Unreimbursed Medical Expenses | $0.00 | ($100.00) | |
| Dependent Care | $0.00 | ($300.00) | |
| Taxable Income | $2,500.00 | $2,000.00 | |
| Federal Income Tax(20%) | ($500.00) | ($400.00) | |
| State Income Tax(5%) | ($125.00) | ($100.00) | |
| Social Security Tax(7.65%) | ($191.25) | ($153.00) | |
| Medical Insurance Premiums | ($100.00) | $0.00 | |
| Unreimbursed Medical Expenses | ($100.00)) | $0.00 | |
| Dependent Care | ($300.00) | $0.00 | |
| Net Paycheck | $1,183.75 | $1,347.00 | $163.25(13.8%) |
Employer
| Without Plan | With Plan | Savings | |
| Social Security Tax | ($191.25) | ($153.00) | $38.25 |
| X 12(months) | |||
| Net Annual Savings per participant | $459.00 | ||
| Annual Savings (based on 5 participants) | $2,295.00 |