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Section 125 Plans

Employee Benefits

Part 2 of Making Benefits More Affordable

Section 125, or cafeteria, plans allow employees to pay qualified medical, dental, or dependent-care expenses on a pretax basis, which has the effect of reducing their taxable income as well as their employer's Social Security (FICA) liability, federal income and unemployment taxes, and state unemployment taxes where applicable.

One type of section 125 plan, a Premium Only Plan (POP), helps employees lower their health insurance costs while maximizing tax savings. In our full e-book, you'll find a detailed example and a calculator for determining your potential POP savings.

Another section 125 plan is a Flexible Spending Account (FSA). An FSA allows employees to pay with pretax funds qualified out-of-pocket health and dependent care expenses not covered by their benefit plans. This effectively reduces employees' taxable income, which in turn reduces their employer's Social Security payroll tax liability. The e-book includes a savings example.

Watch this video for more about section 125 plans, including new guidelines. Then watch our related videos for the rest of our e-book, 7 Questions Every Small Business That Hires Employees Will Have to Answer.

Part 1 - Three Things to Consider When Choosing Employee Health Insurance

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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