How Cafeteria (Section 125) Plans Help Employers with 50+ Employees Comply with the ACA

When your company reaches 50 or more full-time or full-time equivalent employees, you’re considered an Applicable Large Employer (ALE) under the Affordable Care Act (ACA). That designation comes with very specific obligations, including the requirement to provide affordable, minimum-value health coverage to most of your workforce. The penalties for failing to comply can be steep, often amounting to thousands of dollars per employee per year. For many businesses, one of the most efficient ways to navigate these requirements while also maximizing tax savings is by implementing a cafeteria plan, also known as a Section 125 plan.

At NPN Brokers, we work with businesses of all sizes, but especially those navigating the complexities of ACA compliance for the first time. Cafeteria plans can play a central role in both compliance and employee satisfaction, and our team helps companies put the right structure in place quickly and without the burden of contracts, large deposits, or audits.

What is a Cafeteria (Section 125) Plan?

A cafeteria plan is a written benefit program authorized under Section 125 of the Internal Revenue Code. It allows employees to choose between receiving taxable compensation (such as cash) or selecting from a menu of pre-tax benefits. The most common options include health insurance, dental and vision coverage, flexible spending accounts (FSAs), and dependent care assistance programs.

The “cafeteria” concept comes from the idea that employees can essentially build their own benefits package from a menu of options. Rather than being locked into a single employer-sponsored health plan with no choice, they can select coverage that best meets their personal needs and family situation. For employers, cafeteria plans provide tax advantages while also helping ensure ACA compliance by structuring coverage options that qualify as affordable and minimum value.

Why Cafeteria Plans Matter for Employers with 50+ Employees

When you cross the 50-employee threshold, you’re now responsible for offering health insurance under the ACA employer mandate. Specifically, you must offer coverage to at least 95% of your full-time employees and their dependents. That coverage must also meet the ACA’s affordability test, meaning the employee’s share of the premium for self-only coverage cannot exceed a set percentage of their household income (9.12% for 2023, adjusted annually).

Without a compliant plan, your business risks significant penalties. For example, if you fail to offer coverage to 95% of eligible employees, the “A penalty” could apply, which in 2023 was nearly $2,880 per employee, minus the first 30 employees. If you do offer coverage but it isn’t affordable or fails to provide minimum value, the “B penalty” may apply, costing $4,320 per employee who opts for subsidized coverage through the exchange.

Cafeteria plans provide a structured and tax-advantaged way to offer ACA-compliant coverage. They allow you to formalize the benefits program in writing, give employees options, and ensure the plan meets federal standards. Without a cafeteria plan in place, many employers struggle to properly deduct employee contributions pre-tax, potentially opening themselves up to IRS scrutiny.

Key Benefits of a Cafeteria Plan for Employers

Cafeteria plans aren’t just about checking the ACA compliance box. They bring a wide range of advantages that impact both your business and your employees.

Tax Savings for Employers
By allowing employees to pay their share of health premiums and other benefits on a pre-tax basis, cafeteria plans reduce your company’s payroll tax liability. This means lower costs for FICA, FUTA, and other payroll taxes. For businesses with larger workforces, these savings can add up to tens of thousands of dollars per year.

Employee Tax Benefits
Employees also benefit directly. Contributions made through a cafeteria plan are deducted pre-tax, reducing their taxable income. This lowers the amount they owe in federal income tax, Social Security, and Medicare taxes, putting more take-home pay back in their pockets.

Flexibility in Benefits Design
A cafeteria plan lets you offer more than just health insurance. Depending on your structure, you can include dental, vision, life insurance, disability coverage, FSAs, dependent care accounts, and even certain wellness benefits. This flexibility allows you to tailor benefits to your workforce’s needs and improve employee satisfaction.

Enhanced Employee Retention and Recruitment
With the job market more competitive than ever, offering a customizable and tax-efficient benefits package sets your company apart. Employees value choice, and a cafeteria plan is an attractive feature that can help you recruit top talent and retain your current team.

Streamlined ACA Compliance
Perhaps most importantly for Applicable Large Employers, a cafeteria plan helps ensure that your benefits structure is aligned with ACA rules. By having a formal written plan, you’re able to clearly document compliance with affordability standards and coverage requirements.

How Cafeteria Plans Work with ACA Requirements

The ACA requires that employer-sponsored health plans meet two main standards: they must be “affordable” and they must provide “minimum value.” A cafeteria plan makes it easier to meet both.

Affordability
Because employee contributions are made pre-tax through payroll deduction, premiums are more affordable for employees. This makes it easier to structure plans that meet the affordability threshold defined by the ACA.

Minimum Value
The ACA requires that health plans cover at least 60% of the total allowed cost of benefits. By offering a compliant plan through a cafeteria structure, you ensure your employees have access to coverage that meets this benchmark.

Documentation and Recordkeeping
The ACA also requires proper reporting on IRS Forms 1094-C and 1095-C. A cafeteria plan helps ensure employee elections are properly documented, pre-tax deductions are valid, and reporting is accurate.

Cafeteria Plans vs. POP (Premium Only Plans)

Some businesses confuse cafeteria plans with Premium Only Plans (POPs). A POP is actually a type of cafeteria plan, but it only allows employees to pay for their share of employer-sponsored insurance premiums on a pre-tax basis. Full cafeteria plans, on the other hand, can include a broader menu of benefits such as FSAs, dependent care, and other coverage.

For employers just crossing the 50-employee threshold, a POP may be sufficient to achieve ACA compliance and capture payroll tax savings. However, a broader cafeteria plan can offer additional employee benefits and may be more attractive in terms of retention and recruitment.

Common Cafeteria Plan Options

1. Premium Only Plans (POPs): Employees pay their share of health insurance premiums pre-tax.
2. Full Flex Plans: Employees are given a set amount of employer contribution “credits” and can use them toward a variety of benefits.
3. Flexible Spending Accounts (FSAs): Employees set aside pre-tax dollars for medical expenses, dependent care, or transportation.

Each option comes with compliance considerations, but all can support ACA requirements if structured correctly.

Why Work with NPN Brokers for Your Cafeteria Plan

Setting up a cafeteria plan that aligns with ACA mandates requires expertise. At NPN Brokers, we make the process simple:

• You can get a quote in minutes and, in many cases, coverage can begin within 24 hours.
• We don’t lock you into long-term contracts, require audits, or demand large deposits. Instead, we offer a flexible pay-as-you-go structure that grows with your company.
• We work with high-risk industries and businesses that may have struggled to find coverage in the past. Whether you’ve had prior claims or are in a field insurers often consider risky, we can help.
• Our team understands ACA compliance and will make sure your cafeteria plan is designed to meet all federal requirements while also maximizing tax benefits.

Get Your Cafeteria Plan in Place Today

If your business has 50 or more employees, the ACA employer mandate applies to you. A cafeteria plan is one of the smartest and most cost-effective ways to meet these requirements while saving money and offering employees valuable flexibility. At NPN Brokers, we specialize in helping companies like yours navigate compliance with ease.

Call us today at (561) 990-3022 or fill out our online quote request form to get started. We can provide a quote in minutes and get your plan in place quickly, so you can focus on running your business while we handle compliance.