What is a Section 125 Plan?... 

Premium Only Plan (POP)
This plan allows employees to make their contributions to group health and group term life insurance with pre-tax dollars. A Premium Only Plan creates no new benefits. The employer is simply offering a way to obtain favorable tax treatment on benefits already offered. Here's how it works:

• Employees' premium contributions are automatically deducted from their salaries before taxes are taken out.

• Taxable income is reduced by the amount contributed, so employees pay less in taxes and have more take-home pay.

• With employee pre-tax income lowered, employers pay less in Social Security (FICA) payroll taxes. (A business should consult their tax advisor for applicable state legislation.)

A POP is the simplest type of section 125 plan, and it requires low maintanence once it has been set up.

Flexible Spending Acount
This plan allows employees to use pre-tax dollars to pay dependent care expenses and medical bills not covered by their insurance. Usually offered in conjunction with a POP, the FSA is a budgeting tool that can help take care of out-of-pocket expenses such as day care, dental and optical care deductibles, co-pays, and prescription drugs. Like a POP, an FSA helps pay for itself by increasing employee take-home pay while decreasing employer payroll taxes. Here's how it works:

• An employee decides how much of their salary should be set aside before taxes are calculated.

• This amount is automatically deducted from their paycheck every pay period, just like any other payroll deduction, and is deposited into their FSA account.

• The employees would pay their out-of-pocket expenses upfront, then submit a claim and documentation and a reimbursement is made from their own account.
  

Out-of-pocket expenses include:

• Eyeglasses and contact lenses

• Medical insurance deductibles

• Prescriptions

• Co-payments

• Orthodontia

• Chiropractic services

• Dental treatments

• X-ray and laboratory services

Dependent care expenses include:

• Care for a child under the age of 13

• Care for a disabled spouse or dependent incapable of caring for him/herself

• Household-related services (i.e., visiting nurse)

The flexibility of an FSA plan makes it the best option for small to medium-sized companies.

Full Cafeteria Plan
A full cafeteria plan usually includes POP and FSA features. Under this plan, employees receive a lump sum of money to spend on their benefits and the employer provides a menu of benefit options for employees to choose from. If the employee does not use all of their allotted money towards benefit costs, whatever is leftover will be included in the employee's taxable income for the year.

Full cafeteria plans are popular in very large companies. Due to the high level of flexibility offered to the employees, the maintenance on this type of plan is extreme. Paychex does not currently offer full cafeteria plans.

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