By Gregory Boop, About.com Guide

A good way to provide health care benefits to your business employees is with the establishment of a Section 125 Plan - also known as a cafeteria plans, flexible spending plans or similar names depending on the specific plan's purpose. The plans are named after Title 26, Section 125 of the United States Code where "cafeteria plans" are specifically excluded from the calculation of gross income for federal income tax purposes.

Not only does a Section 125 plan allow an employer to provide health care benefits, a full cafeteria plan can be used to provide dependent care benefits and spending accounts for employees to decide what they want in their benefits plan.

How the Plans Work

125 plans allow employees to contribute pretax dollars into the plan. Contributions toward plans are not subject to federal, state, or social security taxes. The contributions are placed into an account the employee can use to pay for allowed expenses (e.g., premiums for health insurance, dependent care costs, medical supplies). Since no federal, state or social security taxes are taken out and the dollars are not included as gross income, the employee saves anywhere from 27 - 50% on these purchases. The employees determine what aspects of benefits are important to them. And, because the employee is paying a portion of the benefits premiums, premiums are lowered for businesses and smaller employers can offer benefits.

There are still greater benefits to the employer:

FICA Contribution Savings- Since the employees' contributions are not subject to social security tax (FICA), the employer does not have to pay its matching contribution either. Thus, your business can save 7.65 cents for every dollar contributed.

Workers' Compensation Premium Savings - Since, depending on your state, workers' compensation premiums are set by size of payroll, the employer's payroll is reduced by every contribution resulting in lower workers' compensation premiums.

The cost to the employer is set up, administration and compliance. There are many health insurance companies and administrators out there so you will be able to chose one that fits your company. Even in Massachusetts certain plans have partnered with the state and count toward compliance with state mandates upon the employer. These administrative costs are quickly offset by the savings in FICA and workers' compensation premiums and the employer typically saves money by implementing a 125 Plan. Check with your business health insurer and insurance professional and see if making a 125 Plan part of your business insurance plan will work for your company.

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