Café 125 stands for IRS regulation code section 125 regarding tax-free cafeteria plans. These cafeteria plans allow employees to set aside pre-tax income for certain employer-offered benefits. Benefits provided by plans covered under Section 125 include adoption and dependent care assistance, health insurance, 401k, and group term life insurance policies. They are called cafeteria plans because employees are given a list of benefits to choose from, similar to a cafeteria-style menu. It is not deductible.
The tax implications of Section 125 Cafeteria Plan are generally as follows:
1-Employee Benefits: The main benefit for employees is that their contributions to the plan are made with pre-tax dollars. This means their taxable income is reduced, so they pay less in federal income tax, Social Security tax, and Medicare tax.
2-Empolyer Benefits: Employers also gain some tax advantages. Employees' contributions to the plan are not subject to Social Security (FICA) or unemployment (FUTA) taxes, reducing the overall payroll burden for the employer.
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