It could seem like a balancing act to provide employees good benefits while cutting payroll expenses. But if businesses have the correct framework in place, they may do both in a way that is legal and works. It’s officially a Section 125 benefit plan, but most people just call it a Section 125 cafeteria plan.
This kind of arrangement changes the way payroll handles benefit money. Employees may utilize pre-tax cash to pay for certain perks instead of taxable income. For employers, it implies cheaper payroll taxes and a more efficient plan, particularly when used with the Lumara Plan.
Let’s talk about how a Section 125 cafeteria plan works with pre-tax benefit deductions and how Lumara builds on this basic idea.
What is a Benefit Plan Under Section 125?
A Section 125 benefit plan is a way for workers to pay for eligible benefits using money that hasn’t been taxed yet. Employees may select from a menu of qualified benefits, which is why it’s called a cafeteria plan.
What happened? Employees pay less in taxes, while companies save money on their payroll taxes. It’s one of the few tools that works for both parties, particularly when it is made to have the most effect.
How Pre-Tax Deductions Work in a Section 125 Cafeteria Plan
Here’s how a Section 125 cafeteria plan works during a normal payroll cycle:
Employees Choose Benefits Before Taxes
Before the start of the plan year, workers may pick which qualifying benefits they wish to pay for using pre-tax cash.
Payroll Changes Gross Income
Before taxes are taken out, the chosen benefit amounts, such as health premiums or out-of-pocket reimbursements, are taken out.
Taxable Income Goes Down
This means that workers have a smaller taxable wage base and the business has to pay less payroll tax.
Employer Sends Payments or Refunds
After that, the employer uses the money to pay for insurance or to pay back authorized out-of-pocket claims.
This arrangement not only decreases the employee’s Social Security, Medicare, and income tax bills, but it also lowers the employer’s matching responsibilities for those same taxes.
What Can a Section 125 Cafeteria Plan Cover?
A simple Section 125 cafeteria plan may include a few basic perks, such as:
- Health insurance premiums paid for by the employer (medical, dental, and vision)
- Flexible Spending Accounts (FSAs) for health care or care for dependents
- Contributions to Health Savings Accounts (HSAs)
- Reimbursements out of pocket, depending on how the plan is set up
But these common choices only cover the basics. These pre-tax advantages may be greatly increased when used with a better plan like the Lumara Plan. This makes them more valuable for both companies and workers.
What the Lumara Plan Does to Improve Section 125 Benefits
The Lumara Plan is built on a Section 125 cafeteria plan and adds a Personalized Claims Management Protocol (PCMP) and a Self-Insured Medical Reimbursement Plan (SIMRP) to make it even better.
This integration does more than just follow IRS rules. It opens up big discounts and options that aren’t accessible in regular plans.
In Actual Life, This Means:
- Employers save more:
Most customers save between $500 and $2,500 a year on payroll taxes for each person they hire. That’s in addition to the savings on premiums that are already there. - Employees take home more money:
Pre-tax reimbursements lower their taxable income, which means they get more money back. - You can get tax-free money back for medical costs that you pay out of your own pocket:
Using the SIMRP structure, you may pay for eligible claims using pre-tax cash, which directly addresses employee issues like deductibles, copays, and prescriptions. - No extra expenses to give better benefits:
The Lumara Plan doesn’t cost more money (and sometimes saves money), so companies may improve their benefits without spending more money.
Example of Savings in the Real World
Let’s imagine that 25 people work for the firm and they provide the Lumara Plan. Every employee chooses $2,000 worth of qualified reimbursements before taxes. That’s $50,000 taken out your taxable pay.
This is What Happens:
- The employer doesn’t have to pay more than $3,825 in FICA and FUTA payroll taxes.
- Each worker saves around $500 in federal taxes, plus any state tax savings that apply.
- Claims that are paid back, such as medicines or visits to a specialist, are completely tax-free and legal.
These savings happen automatically via payroll, and they are fully compliant with the IRS. Lumara takes care of all plan management.
What Sets the Lumara Plan Apart?
The Lumara Plan is different from other cafeteria plans since it is designed to do more than just pay for insurance. It focuses on making the most of pre-tax reimbursements that are allowed, making compliance easier, and making sure that all benefits follow IRS Section 125 guidelines.
Some Important Things That Set Them Apart Are:
- Complete plan design and writing
A strategy in writing is required by the IRS. It is delivered by Lumara. - Checking for compliance on a regular basis
This includes testing for prejudice, helping with audits, and updating plans. - Talking to and onboarding employees
That way, everyone in the team understands how to utilize the strategy and get the most of it. - Processing reimbursements in real time
Employees don’t have to wait weeks to get their tax-free payments.
Why Employers Need to Act Right Away
Employers might lose thousands of dollars in tax savings by waiting until the following plan year or open enrollment. The Lumara Plan will help both parties save money as soon as it is put into action.
It is even feasible to start in the middle of the year. Lumara takes care of everything from setting up the plan to communicating with employees and launching it. This makes it simple to convert from a basic cafeteria plan to a plan that focuses on outcomes.
Conclusion
A Section 125 benefit plan is more than simply a way to keep track of things; it’s a plan. When set up correctly, it lets businesses pay less in payroll taxes and workers take home more money. But when used with the Lumara Plan, it becomes a strong tool for development, retention, and real financial relief.
The Lumara Plan turns a regular Section 125 cafeteria plan into a personalized solution that works better for everyone by following all IRS rules, having integrated reimbursement procedures, and without costing the company anything.