Section 125 Plans - Medical Reimbursement or "Cafeteria Plans" Explained

Simply put, Section 125 allows employee-paid premiums to be deducted from gross wages before taxes are applied. The effect is that the employee pays less in federal and state income tax and FICA tax, thus netting more take-home pay. The employer also pays less, since fewer dollars are paid for FICA and unemployment taxes. Thus, a win-win situation is established.