IRS Section 125 (Cafeteria Plans)

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Section 125 of the Internal Revenue Code allows employees to pay for certain benefits (like health insurance premiums) on a pre-tax basis through cafeteria plans.

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Requirements

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• Written Plan Document – Employers must establish and maintain a written Section 125 plan.

• Eligible Benefits – Includes health insurance premiums, FSAs, HSAs, and dependent care accounts.

• Nondiscrimination Testing – Plans must pass annual tests to ensure benefits are not offered disproportionately to highly compensated employees.

• Employee Elections – Must be irrevocable during the plan year, except for certain qualifying events.

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Why this matters:

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• Pre-tax benefits save employees money and reduce employer payroll taxes.

• Non-compliance can result in taxable benefits, IRS penalties, and loss of tax advantages.

 

At Sprout & Vine, we integrate Section 125 plan administration with payroll, so elections, deductions, and compliance testing are aligned and accurate.