Employers can realize tax savings while lowering the out-of-pocket costs employees pay to participate in benefit programs. Section 125-Cafeteria plans are called many names, among them Premium Only Plan, Flex Plan, Flexible Benefit Plan, Flexible Spending Account, Credit Plan and more.

A Cafeteria plan must have a document and must be for the benefit for employees. Partners and 5% stockholders of S-corporations are excluded from participation in these plans. Plans must be tested for non-discrimination. There are generally three types of Cafeteria plans.

The most popular and simplest type is the Premium Only Plan. This plan allows employers to deduct the employees’ share of benefit costs on a pre-tax basis. In many states an employer reduces state and federal wages. Further, the employer saves the cost of FICA and Medicare on the employees’ contributions.

Flexible Spending Accounts and Dependent Care Reimbursement Accounts typically require a third-party administrator. FSA’s allow employees to defer part of their pay (up to $2,500 annually) to pay for specified non-reimbursed expenses. Expenses can include deductibles, coinsurance, co-payments as well as uninsured services such as dental care and vision care services. The Dependent Care account can allow employees under certain circumstances to defer up to $5,000 annually to pay for qualified daycare for dependents. Employees must recognize that amounts deferred from their pay that are not used during the plan year are forfeited. This is known as use it or lose it.