Why All Businesses Should Be on a Cafeteria 125 Plan

So what in the world is a Cafeteria 125 Plan anyway? If you don't know what it is, you don't have it in place. And you might be needlessly throwing money out the proverbial window by not having it in place. The plan is this: it allows you to pre-tax such payroll deductions as insurance premiums, savings account contributions, 401k contributions, etc. Ok. what does pre-tax mean?

Pre-taxing a deduction is not as complicated as it sounds. There is your gross pay and your net pay. Your gross pay is your payment for work done based on your hourly wage or salary for that pay period. Your net pay is what you actually get after the gross pay is taxed on a local, state and federal level. Pre-taxing is simply reducing an employee's gross pay with a specified deduction or deductions prior to governmental taxing. Doing this lessens the amount of tax paid to the government. Here is an example:

Not pre-taxed
$1000 gross pay
-250 taxation (25%)
$750 net pay
-$100 insurance premium
$650 take home pay

Pre-taxed
$1000 gross pay
-$100 insurance premiums
$900 gross pay after pre-tax deductions
-$225 taxation (25%)
$675 take home pay

So you just saved your employee $25 by simply adding a cafeteria plan. Ok. That's good for the employee (which is ultimately good for you), but what about your overall payroll numbers? Let's do some more numbers:

Not pre-taxed
$100000 gross payroll
-25000 taxation (25%)
$75000 net payroll
-$10000 insurance premium
$65000 actual net payroll

Pre-taxed
$100000 gross payroll
-$10000 insurance premiums
$90000 gross payroll after pre-tax deductions
-$22500 taxation (25%)
$67500 actual net payroll

As you can see, in this example of a payroll of $100,000, you get to deduct more for payroll (reducing your capital gains taxes) and you save $2500 in payroll taxes. All of this for simply putting in a cafeteria 125 plan! Starting to make sense now?

Some supplemental health insurance companies will actually put in place a pre-tax plan for premiums at no extra cost, allowing you to save some money, as illustrated above. And by adding supplements, you are allowed greater flexibility in making future healthcare decisions. Medical supplements have been around for several decades, though few companies offer it to their employees. These plans range from typical supplements like vision and dental to more specific programs like accident and cancer plans.

Please visit http://www.oh-healthcare.com

Michael Lambert is licensed in health and life insurance in the state of Ohio. He lives with his beautiful and patient wife and four amazingly brilliant boys in Vermilion, Ohio, a western suburb of Cleveland. Michael is an award-winning graphic designer and has over 12 years experience in marketing, in both business to business and business to consumer communications. He loves being an insurance agent a thousand-fold more than his previous career because he gets to help both people and struggling businesses meet their goals.