With Section 125, employers have the power to establish tax-advantageous programs that can significantly enrich their current benefits plans. As a result, controlling and maintaining benefits costs can be substantially improved, today and into the future. Section 125 of the Internal Revenue Code, enacted by Congress in 1978, allows companies to give their employees the opportunity to pay for benefits on a pre-tax basis. Premium Only Plans . This alternative is the most basic use of Section 125.
Employees can pay for benefits on a pre-tax basis, thus lowering their taxable income.
This alternative gives employers the opportunity to gain control over their benefit expenditures through a cafeteria or menu-like plan. A Cafeteria Plan is the most complex alternative because it changes the way employees receive benefits. The employee then chooses from a menu of benefits and determines those that best fit his or her needs. Of course, the employer determines the available options. Although a Cafeteria Plan is more expensive to implement, employers ultimately save money through the more efficient plan design, as well as the tax-effective and cost effective vehicles of delivery.