Section 125 Plans, also known as Cafeteria Plans, came about through Congress in 1978 and are named after their Internal Revenue Code. Such plans provide an employee benefit plan under which the employee makes an irrevocable decision to forego a portion of future income in exchange for receiving future benefits not subject to income tax at reception date. Essentially, Section 125 plans are created using pre-tax dollars, enabling the employee’s dollars to stretch farther. The employer deducts the cost of the employee’s future benefits from present income as a business expense.

These Plans Usually Provide Three Options:

• Premium Conversion – employee contributes a proportionate share of the family health care costs with pre-tax dollars.
• Medical Reimbursement Account – employee is able to use a Salary Reduction Plan to pay with dollars on a pre-tax basis for medical expenses not covered by insurance; a separate medical reimbursement account is established for each employee.
• Dependent Care Reimbursement Account – employee is able to use a salary reduction plan to pay with dollars on a pre-tax basis for dependent care expenses.

Section 125 pre-tax plans offer an opportunity for employers to save on their health insurance costs. However, implementing and administering the plan can be challenging: