Section 125 of the IRS Code (Cafeteria Plan) Law and Legal Definition
Have you heard of a cafeteria plan? It’s a plan that allows employees to choose from a variety of cash and benefits options, including medical, accident, disability, vision, dental, and group term life insurance. The best part? Some of these benefits can be paid with pre-tax deductions from wages, so employees take home pay is not affected!
Once employees elect to shift a portion of their gross salaries as a pre-tax benefit into the plan, the election is not revocable for one year except under specific circumstances such as changes in marital status, number of dependents, or spouse’s employment just to mention a few. And by directing salary dollars to a Section 125 Benefit Plan, employers can reduce payroll tax costs as those dollars are not subject to the employer’s Social Security contribution. This can also reduce federal and state unemployment tax contributions and workers’ compensation premiums (Puerto Rico only Federal Taxes).
It’s important to note that a cafeteria plan is regulated under the Internal Revenue Code Section 125. So, if you’re interested in learning more, take a look at what the federal law says.
Puerto Rico is one of the Territories Approved under the US Congress.
