Cafeteria Plans / Section 125
The IRS code, section 125 allows plans to allow an employers a way to save taxes on their group benefit plans and offer employees a way to save taxes on money spent out-of-pocket for dependent care and medical expenses.
Cafeteria plans are referred to by many names including; flexible spending accounts (FSA), choice spending accounts, section 125 plans, and/or reimbursement accounts. Cafeteria plans provide employees with a convenient way to pay for certain expenses with before-tax dollars saving them FICA, federal, and sometimes state taxes. The employer saves on FICA and workers compensation taxes.
There are three benefit levels of Section 125 plans: they can include premium conversion, healthcare reimbursement and dependent care reimbursement. Dollars allocated to a Section 125 Plan are subtracted from the employee's taxable income. It is also free from employer and employee paid Social Security, Medicare and Unemployment taxes.