How the Cafeteria Plan Works Eligible employees may voluntarily elect to purchase qualified insurance benefits (Health Plans, Disability Plans, Cancer Plans, Medical Supplement Plans and Group Term Life Insurance Plans) and have premiums for these benefits deducted from their paycheck before taxes are taken out. This will result in employees paying less taxes and having more take home pay. The Employer will pay less FICA contributions, which will increase the business bottom line and make the benefits more affordable to its employees.
Although the plan goes by a variety of names, such as Premium Only Plans (POP), Salary Reduction Plans, Flexible Benefit Plans and Premium Conversion Plans, all are based on the guidelines of the Internal Revenue Code Section 125. In layman's terms, a Section 125 Plan permits employees to purchase fringe benefits with pre-tax dollars instead of after-tax dollars.
The election by employees to voluntarily reduce their gross taxable income results in an employee paying fewer taxes in the area of Federal, State and FICA taxes. Furthermore, when the employee reduces his gross taxable income, the employer also saves money by paying less FICA on the reduced payroll base.
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