A cafeteria plan, also known as section 125 Plan, is a type of plan where employers offer their employee’s several pre-tax benefit options. With this plan, employees can contribute a certain amount of pre-tax income to access certain benefits, such as health insurance, life insurance, and disability insurance.
Who Can Sponsor A Cafeteria Plan?
Generally, any employer with employees subject to U.S. taxes can sponsor a cafeteria insurance plan. This includes:
- S & C corporations
- Sole proprietorships
- Government entities
- Limited liability companies
What Does A Cafeteria Plan Cover?
Depending on the insurance provider, Cafeteria plans may cover a wide variety of medical services, including:
Some over-the-counter remedies and prescription drugs, such as cold and allergy medicine, painkillers, dietary supplements, first aid, and more, may also be covered.
How Does A Cafeteria Plan Work?
You need to decide if you want to register in a cafeteria plan during your company’s open enrollment period, select the benefits you want to receive, and determine how much you’d like to contribute to the plan. Remember that you can’t change your status unless you have a qualifying circumstance, such as a marriage, divorce, or childbirth. When a medical bill not covered by your insurance comes up, you can use cafeteria plan funds to clear the bill.
What Are The Benefits Of A Cafeteria Plan?
A cafeteria plan lets employees tailor their benefits to how they best feel they need them. Their benefits include:
- Allow employees to pay for retirement and insurance plans without tax penalties
- Fewer taxes deducted and more take-home pay from employee paychecks
- The capacity to invest tax savings into retirement plans
- Deductions when registering for care expenses