What Is a Section 125 Cafeteria Plan and Should Maryland Employers Offer One? 

A strong benefits package helps Maryland employers hire and keep good employees. One of the options we recommend most often is the Section 125 Cafeteria Plan. Named after the IRS code that governs it, this plan allows employees to pay for certain qualified expenses using pre-tax dollars. By implementing a Section 125 plan, our team helps Maryland employers reduce their payroll taxes while increasing their employees’ take-home pay.

Understanding Plan Types

There are three primary ways to structure a Section 125 plan:

1. Premium-only plans (POP): This is the most common and simplest option. It allows employees to pay their portion of health insurance premiums with pre-tax dollars, reducing their taxable income.
2. Flexible spending accounts (FSA): Employees can set aside funds for out-of-pocket medical, dental and vision expenses. Because the money is deducted before taxes, employees pay less tax on routine healthcare costs. A related option, the dependent care FSA, lets employees pay for childcare or eldercare services, which many working families in Maryland rely on.
3. Full cafeteria plans: These plans combine multiple pre-tax benefits, such as health coverage and FSAs, into one comprehensive plan, giving employees more flexibility in how they use their pre-tax dollars.

How Maryland Employers Benefit

Beyond helping your staff, these plans offer direct advantages to your business. Because employee contributions are made pre-tax, they are not typically subject to FICA (Social Security and Medicare) taxes. This means that for every dollar an employee contributes to their Section 125 plan, the employer’s tax liability could decrease.

The savings grow with participation. The more employees who enroll and the more they set aside, the less payroll is subject to FICA, so the annual savings can be substantial for a small or midsize employer. Employees see the difference in every paycheck rather than waiting until they file their taxes.

Is a Section 125 Plan Right for Your Business?

The IRS requires a written plan document before the first pre-tax deduction, and employee elections are generally locked for the plan year unless a qualifying life event occurs. If your business can work within a fixed annual election cycle, the tax savings usually outweigh the paperwork involved in setting the plan up and keeping it current.

Our team is here to help you optimize your Maryland employee benefits strategy. If you are ready to explore how a Section 125 Cafeteria Plan could benefit your business, contact us today.

This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.