Human Resources

Pre-Tax Benefits to Employees

If you don't already offer a 125 cafeteria plan, you ought to think about it. It offers a no-brainer way to give some real financial benefits to your staff without breaking the bank.

The 125 cafeteria plan, or "salary reduction" plan, allows employees to pay for such out-of-pocket expenditures as healthcare expenses, healthcare premiums, and dependent care expenses with pre-tax dollars.

The way it works is that employees fill out a plan form at the start of the fiscal year to declare what expenses they expect to incur during the year and have to prorated estimated deducted from their paycheck. The reductions are placed in a separate account against which the employee can be reimbursed for those types of expenses. At the end of the year the employees have been reimbursed for those incurred expenses and their W2's show a lower gross income - which is taxable - as compared to their gross income if they were not on the 125 cafeteria plan.

What the employee has to be aware of is that any deducted funds remaining in their account at the end of the year will be lost (re-absorbed by the employer). Consequently, it makes sense to use this benefit only if expenses are anticipated and to set the estimate at or less than an amount that the employee can be sure of expending.

Once the employee has signed up for the 125 cafeteria plan, the employee's participation can only be modified by increasing the salary reduction (more deducted from the paycheck) or if there is a significant change in the employee's lifestyle (e.g., marriage status, number of family members, health plan).

Be sure to consult with your accountant or financial advisor to set up the appropriate plan for your needs.


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