Known sometimes simply as a ‘Section 125’ plan, cafeteria plans are one of the options available for employers looking to compensate their employees for the cost of health care. With a Section 125 plan, employers offer a fixed tax-free benefit amount, and employees can choose how to spend that benefit.
Employees can either put that benefit towards health insurance premiums, or receive the same amount in their salary. If the benefit is used for eligible benefits, it remains tax-free. If the employee chooses to receive the benefit as part of their salary, it will be subject to taxes.
Section 125 plans are relevant because they can make it easier for your employees to contribute to an HSA. They can also make HSAs even more affordable for employers. Under a Section 125 Plan, employee HSA contributions are not subject to Social Security tax, Medicare tax, or FUTA.
Section 125 Plans are not required to make contributions to an employee HSA, as contributions can also be made directly.