Section 125 (Cafeteria) Plans

Key Features

  • Contributions by employees are tax deductible
  • Flexible spending elections are subject to "use it or lose it" requirement

High taxes, dramatic increases in the cost of employee benefits, and recognition of diverse needs among employees have all come together to create powerful incentives for employers to review the cost and value of employee benefit packages.

As a result of such reviews, more and more organizations are making the decision to move to a flexible benefits plan. Today over one million employees throughout the U.S. are covered by flexible-type plans.

Now, with a Flex Plan, employees of smaller firms can have much the same flexible compensation advantages as employees of such corporations as Exxon, Pepsi Cola, Chemical Bank, Quaker Oats, Marriott, Morgan Guaranty Bank, B.F. Goodrich, Motorola, Alcoa and hundreds of other major corporations.

The popularity of flexible compensation can be attributed to the distinct advantages such a plan holds for the employer:

Flexible compensation provides a means for the organization to take advantage of current tax laws, resulting in a substantial savings in benefit dollars.

  • Flexible compensation provides a vehicle that enables employees to pay for certain expenses with pre-tax dollars.
  • Gain control of benefits costs.
  • Provide better benefits options.
  • Gain the ability to make a wide diversity of employees happy.
  • Educates employees about benefits and provides incentives for employees to use the benefits efficiently.
  • Gives employees "ownership" of selected coverages which in turn fosters greater employee appreciation for the overall benefit program being provided.

In addition to the tax savings, one design technique presently being used by the Fortune 500 companies to reduce costs with the integration of a Flex plan, is a cost-containment approach which can be especially helpful to employers who are considering plan design changes, such as increased deductibles and co-insurance.

It is worth noting, however, that it is not necessary for an employer to change the present benefit structure in order to enjoy the advantages that flexible compensation brings to both employer and employee.