Expenses such as maintenance medications (medication taken daily or weekly), yearly eye care, and routine or special-need dental work can all be accounted for. Flexible spending account rules allow pre-tax deductions to be used to fund these applicable medical expenses and can lead to significant amounts saved each quarter and year. Often, a third-party administrator can be the easiest route to help you set up a new employee benefits plan and manage day-to-day administration. Integrated HR technology can also help link benefits and payroll processing to ensure the proper employer and employee contributions are made and taxes are correctly calculated.

How do employers set up a section 125 benefits plan?

Section 125 is part of the IRS Code created to make benefit programs more affordable for employees. Under this code, employees are allowed to convert a taxable cash benefit (salary) into non-taxable benefits. The employee usually pays less in federal income and/or FICA taxes because the employee’s contribution is withheld before taxes. Some parts of your W-2 form are fairly straightforward, such as the amount of federal income tax withheld and Social Security wages and tax. If you’ve ever wondered “What is S125 on a W-2 form?” you will learn that it refers to your health insurance plan.

Who Cannot Participate in a Section 125 Plan?

The IRS deducts a portion of your paycheck as a tax based on a percentage of what you earned that month. That money goes into the system, meaning that while you still eventually benefit from it in the form of Medicare and Social Security, it will not help you right now. These benefits can help offset the initial plan setup fee and even help the company to save substantially in the long term. A wide variety of medical and childcare expenses are eligible for reimbursement under a Section 125 plan.

Each year, employees may elect to put a portion of their paycheck into the cafeteria plan in addition to contributions made by their employer. This amount is deducted from their paycheck each month and applied toward one of the plan’s non-taxable benefits. A Premium Only Plan (POP) is a great way to save on insurance premiums with pre-tax dollars contributing to the overall cost. In combination with group health insurance, a POP reduces taxable income and results in a reduction in the amount used to determine your company’s FICA and FUTA payroll taxes, as well as any applicable state taxes. Employees can choose to deduct amounts from their gross income to contribute to a section 125 plan on a pre-tax basis.

A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media. If you have a policy that provides payments for other than medical care, you can include the premiums for the medical care part of the policy if the charge for the medical part is reasonable. The cost of the medical part must be separately stated in the insurance contract or given to you in a separate statement.” This technique allows to pay for health insurance with pre-tax money.

• A section 125 plan allows employers to offer employees, their spouses and dependents certain benefits on a pretax basis, thereby lowering the employee’s taxable income.
• Medicare Supplement insurance plans are not linked with or sanctioned by the U.S. government or the federal Medicare program.
• One drawback to cafeteria plans is that benefits are considered “use it or lose it.” Any remaining funds over $500 are forfeited at the end of your benefit year.

Small business employee benefits

To sponsor a section 125 plan, businesses must employ an average of 100 or fewer employees during either of the preceding two years. With healthcare costs continually on the rise, a section 125 plan can not only help augment your employee benefits package, but it can also offer certain employer and employee tax advantages. Section 125 is simply a section of the tax code that describes a number of different employee fringe benefits they can be paid pre-tax. Health insurance is just one of these, by paying health insurance pretax, it is removed from your taxable income before your taxes are counted.

Setting Up a Section 125 Plan

Dozens of eligible expenses for medical items and treatments can be reimbursed. The benefits are available to employees, their spouses, and their dependents when a plan is created. Depending on the circumstances and details of the plan, Section 125 benefits may also extend to former employees but the plan cannot exist primarily for them.

• When employees elect to make pre-tax contributions, the amounts are not subject to the employer’s share of FICA taxes and federal unemployment taxes.
• Entries here do not affect tax calculations as box 14 is an informational area for the employer to use.
• Other options include retirement deposits, supplemental life or disability insurance, Health Savings Accounts, and various medical or dependent care expenses.
• If you owe $6000 in tax and you had $6000 of withholding, you would break even at tax time.
• Under this code, employees are allowed to convert a taxable cash benefit (salary) into non-taxable benefits.

As an employer, offering FSAs and HSAs to employees can help offset costs that health insurance plans don’t cover. Offered solely in conjunction with a group medical plan, an FSA benefit can help employees budget for predictable out-of-pocket medical expenses, such as co-pays, routine prescriptions, or dental care. Consider how much an employee’s household might spend in a year on eligible expenses with the FSA Calculator tool.

Some employers who do not offer employer sponsored health insurance – use section 125 health saving account to put pre-tax money through payroll deductions and use these funds to pay a premiums for employee’s health insurance. Section 125 plans offer employers a lot of tax-saving benefits. Combined with the other tax savings, the Section 125 plan usually funds itself because the cost to open the plan is low.

See Why Nearly 800,000 Businesses Use Paychex

Often, the Section 125 plan itself and the Summary Plan Description are provided by a third party administrator, for an annual fee. Depending on the complexity of the Section 125 Plan, there may also be a per employee, per month fee for this administration work. A per participant fee is most commonly charged when the Section 125 Plan includes the ability for employees to deposit pre-tax money into a Flexible Spending Account (FSA). In this case, the plan administration includes more than just an annual update to the Section 125 plan document.

Benefits offered under the plan are pretax, which means your premiums are taken out of your wages before taxes are withheld, which lowers your taxable income and therefore your tax burden. If employees are enrolled in a section 125 cafeteria plan, their pre-tax sec125med benefit contributions will be noted along with other payroll deductions on their pay stub. A cafeteria plan is a cost-effective way for businesses to sponsor benefits packages. It offers tax advantages for employers and employees alike and is a key component of many talent acquisition strategies.

You won’t be able to claim a medical expense deduction for Section 125 health insurance plans; the cost of those premiums has already been deducted from your taxable income. This approach is much more beneficial than claiming the premiums as a medical expense deduction, since those deductions are very restricted. Section 125 plans offer tax benefits to both employers and employees when plans are set up in accordance with IRS stipulations. To ensure that your plan qualifies for section 125 status, you’ll need to follow certain rules. First, the rules of the plan must be explained in writing and allow employees to choose between cash or taxable benefits as opposed to the qualified benefits that are available on a pre-tax basis.