What are Section 125 Plans?
Filed Under (Flexible Benefit Plans) by Group Health Insurance on 23-06-2009
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Section 125 Plans are also known as cafeteria plans, flexible benefit plans or mini-flex plans. Section125 of the Internal Revenue Tax Code defines these plans with strict guidelines.
These plans were originally added to the tax code in 1978, but didn’t become popular until 1986 when additional tax laws were added that gave employees’ more tax advantages.
They were created as tax savings plans wherein participants could save tax dollars. With these flexible benefit plans, group health plan premiums and eligible healthcare and dependent care expenses are paid for with “untaxed” dollars.
Deductions are taken from the participant’s paycheck and placed into a separate bank account as contributions to the participant’s flexible benefit plan. The participant submits legitimate claims to whoever is administrating the account and they are reimbursed for expenses.
The key is that the money deducted from the participant’s paycheck is never taxed. Thus, the participant’s net take home pay is higher because they don’t pay taxes on these funds. They get the funds via reimbursement for legitimate expenses and don’t pay taxes on those funds.
