Do You Need A Section 125 Plan Document? Get One Today!
Employees also have the advantage of choosing which programs to enroll in and which to decline to get the specific benefits that are most important to them. An example of the taxable benefit option could be allowing employees to take the monthly amount as part of their salary rather than applying it towards the benefit plan. With traditional company-sponsored healthcare insurance, the employer generally pays part of each employee’s premiums. If an employee opts out of the plan, he or she does not receive compensation for the amount their premiums would have cost.
For example, your employer must report the cost of major medical, but your contributions to a health flexible spending account aren’t reportable. The data in Box 12 is for informational purposes only, so employees know the cost of their health coverage. Your employer may also use Box 12 to report certain retirement plan contributions and nontaxable moving expenses, under the required codes. Since employees’ wages contributed to obtain qualified benefits aren’t subject to income taxes, both the employee and the employer save on payroll taxes. Employees enrolled in a section 125 plan can set aside insurance premiums and other funds pretax, which can then be used on certain qualified medical and child care expenses.
What Are The Best Ways To Lower Taxable Income?
The full-blown plan is called a consumer-driven health care plan and involves a credit system the employee can use on a discretionary basis for qualified expenses. Employees can then supplement the CDHC with their own money and use it to buy additional benefits or coverage. Having Cafe 125 reported on your W-2 does not change the way you prepare and file your tax return. The money deferred to pretax plans should already be subtracted from the total amount of your wages reported in box 1 on your W-2.
to include salary reduction, in which the employee elects to decline to receive a portion of his or her pay and directs the employer to use the money to pay the employee’s contribution toward a specified benefit. Under the Code, the money, if used by the employer to pay premiums for a POP, is not constructively received by the employee and is not subject to tax. Employers who offer a POP are not required to offer employees any other form of cash, including cash in lieu of benefits, so employees who opt out of coverage receive no benefit, taxable or nontaxable. However, employers may offer cash in lieu if they choose, and if the employee accepts it, it is a taxable benefit (see the sidebar “A Closer Look at POPs”). A premium-only plan allows employees to pay their portion of insurance on a pretax basis. The flexible spending account version allows for out-of-pocket qualified expenses to be paid pretax, which is the style of plan described above.
- Cafeteria plan benefits come in various forms, including health and life insurance, dependent care and adoption assistance, accident insurance and health savings accounts.
- Cafeteria plans are so commonplace that the origins of this treatment and the attendant requirements are often ignored, particularly among small businesses.
- Each benefit has its own tax implication; not all benefits are excluded from the same taxes.
- However, your life insurance premiums on coverage over $50,000 are subject to Social Security and Medicare taxes, but not federal income tax.
- For example, no federal income tax, Social Security tax or Medicare tax comes out of your health insurance premiums.
On average, employees can save 30% in combined federal, state and local taxes on a variety of items that they typically already purchase with out-of-pocket post-tax funds. Premium Only Plan A POP allows you and your employees to pay insurance premiums with pre-tax dollars. Together 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 and any applicable state taxes.
Offering cafeteria plans to employees can save money for employers. Most cafeteria plans are not subject to Medicare taxes, and by allowing employees to defer income to these programs, employers generally pay less in payroll taxes. Cafeteria plans also can build employees’ loyalty within the company by saving them money and offering benefits they could not otherwise afford. If you offer your employees pretax medical insurance, you do so through a Section 125, or cafeteria, plan, which exempts their premiums from specific taxes. For some reason, you may need to refund an employee’s medical contributions. This may happen, for instance, if she stopped her medical coverage, but you did not stop her deductions in the payroll system.
With a Section 125 Cafeteria Plan, however, the employer may choose in this situation to offer the cost of the benefits as cash. The employee may use the money towards another benefit; though, if the employee receives cash, that money is taxed. A Section 125 Cafeteria Plan is an employer-sponsored benefits plan that lets employees pay for certain qualified medical expenses – such as health insurance premiums – on a pre-tax basis. On Aug. 6, 2007, the IRS issued proposed regulations governing Section 125 plans Ñ aka cafeteria plans Ñ reflecting several changes occurring since 1997, as well as incorporating new guidance. Employees can be given the opportunity to receive medical, dental, vision and other qualified benefits and contribute to the cost on a pre-tax basis in lieu of receiving taxable wages. Federal law requires that employers providing group health insurance must report the value of the coverage in Box 12 of employees’ W-2, under Code DD. This amount includes the total paid by the employer and its employees. Only specific types of coverage must be reported; others aren’t required or are optional.
Social Security Payroll Deduction Limit
As a result, the employer’s FICA, FUTA, SUTA, and Workers’ Compensation costs are also lower. Lower payroll taxes can also help reduce or eliminate the costs of offering the cafeteria plan. The primary advantage to employees is the range of healthcare options that allows them to use Section 125 money to fit their needs. Typically, they can use the pre-tax money to pay for health insurance premiums, retirement deposits, or other benefit options. If they don’t want any of the offered benefits, they may be able to choose alternatives; options may include cash or other taxable benefits, like supplemental life or disability insurance. Section 125 plans are an easy way for employees up to 40% of the costs of insurance premiums. An alternative to these plans are section 105 plans where employers reimburse employees for premiums they actually pay for, as opposed to pre-funding an account.
Sec. 1.125-1, allows employers to offer only a choice between pay and health care benefits . Employees who opt in pay no taxes on the portion of their salary used for their share of the health care premium. Employees who opt out might do so because they have coverage through a spouse or partner; they may also need the additional pay, even though it is taxed.
Calculate how much you can save when your employees contribute money toward an FSA. In combination with group health insurance, a Premium Only Plan pays a portion of employee-paid insurance premiums on a pre-tax basis. This helps them save on health insurance costs while you save on certain payroll taxes.
You should verify that this information is reported correctly before filing your tax return. If you find a discrepancy on Form W-2, you should contact your employer immediately to have it corrected. Also, remember that these benefits are paid for with pre-tax dollars so they are not eligible to be used as a deduction on your return. For example, health insurance is a common benefit offered by these plans, but you cannot also use these costs as a medical deduction on Schedule A if you paid for them through your cafeteria plan. The employee advantages of enrolling in cafeteria plans are simple.
A Section 125 Premium Only Plan allows employees to pre-tax insurance premium such as group health and dental, vision, accident, term life insurance, disability, etc. Employees save up to 40% in payroll taxes and the employer save 7.65% in matching FICA taxes. If you are an employer wanting to allow your employees to pay group health and other insurance premiums with pre-tax salary deductions, the answer is yes, you need a Section 125 plan document. Just like other employee benefits areas, there are consequences if the employer does not comply with the regulations. At that point, all employee pre-tax withholdings from the plan may revert to gross income to the employee.
On the employer side, section 125 plans offer lots of tax-saving benefits. For each participant in the plan, employers save on the Federal Insurance Contributions Act tax, the Federal Unemployment Tax Act tax, the State Unemployment Tax Act tax and workers’ compensation insurance premiums. Combined with the other tax savings, the section 125 plan usually funds itself, as the cost to open the plan is low. Once a plan is created, the benefits are available to employees, their spouses and dependents. 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. Reduced payroll taxes for employees who participate in the 125 cafeteria plan.
With a POP, employers do not have to pay FICA/FUTA taxes (~7.65%) on dollars that employees use toward the cost of their individual health insurance premiums. A Section 125 premium-only-plan , is a cafeteria plan which allows employees to pay their health insurance premiums with tax-free dollars. Traditionally, POP plans have been used in combination with employer-sponsored group health insurance plans. However, employees can also use POP plans to pay individual health insurance premiums with tax-free dollars. Your employer may report your cafeteria plan deductions in Box 14, which is labeled “Other.” It might use the code “Section 125” or “Café 125,” and then state your pretax payments. This data is optional and can clear up any confusion you have about the amount in Box 1. For example, the year-to-date gross amount on your last pay stub for the year shows all of your wages for the year, including your pretax payments.
If you add the amount in Box 14 to the amount in Box 1, it should equal the amount shown on your pay stub. Your employer can show other types of payments and wages in Box 14, such as union dues, nontaxable income, educational assistance payments and certain contributions to a pension plan. Under a cafeteria, or Section 125, plan, you pay for your employer-sponsored benefits with pretax money. Your employer deducts your payments from your wages before withholding certain taxes.
They are called cafeteria plans because employees are given a list of benefits to choose from, similar to a cafeteria-style menu. Health benefit plans allow employers and employees to set aside funds before they’re taxed to help employees pay for qualified medical expenses in the absence of coverage, or not covered by their health plan. Help reduce your FICA, federal, and state and local taxes for your company and your employees by combining a section 125 premium only plan and flexible spending account with your company’sgroup health insurance. At Paychex, we handle much of the work required to start and manage section 125 plans so you can enjoy the benefits. Successfully aiding the client in offering a useful, compliant Sec. 125 plan will be a win for the client — especially for its employees.
When you refund a pretax deduction, the money loses its tax advantage. A section 125 plan is part of the IRS code that enables and allows employees to take taxable benefits, such as a cash salary, and convert them into nontaxable benefits. These benefits may be deducted from an employee’s paycheck before taxes are paid. Cafeteria plans are particularly good for participants who have regular expenses related to medical issues and child care. A Sec. 125 plan is required for employers who want to allow employees to choose the qualified benefits they want and avoid paying income taxes on the amount of wages they contribute to obtain those benefits.
All other employers can review the Internal Revenue Service’s website to determine if you’re subject to reporting cost of healthcare coverage. A fringe benefit is a form of compensation for the performance of services. Any fringe benefit your company provides is taxable and must be included in the employee’s pay unless the law specifically excludes it. Use this chart to understand the types of fringe benefits and where they are reported on your W-2s. Employees who choose to open a flexible spending account pay for out-of-pocket medical, dental, and dependent care expenses with pre-tax dollars. This gives employees more take-home pay, which decreases how much you pay in FICA and FUTA payroll taxes.
employees, Sec. 125 plans may not discriminate in favor of highly compensated or key employees, and the regulations include tests required with respect to eligibility, contributions, and individual and total benefits. If, under testing, a plan is found to be discriminatory with respect to a plan year, the discriminatory benefits are included in the gross income of the highly compensated or key participants who received them. The sole objective of a POP is to permit employees to pay their share of the premiums for certain health and welfare benefits with pre-tax salary reductions, rather than paying for these benefits with post-tax dollars.
Under Internal Revenue Service guidelines, pretax medical contributions are excluded from federal income tax, Social Security and Medicare tax. State and local income tax rules for pretax medical deductions vary. Still, contact the state revenue agency for clarification, because exceptions may apply. For example, Pennsylvania has specific conditions for which pretax health insurance contributions are excluded from state income tax, such as for sickness, hospitalization and disability or death. Especially among small employers, a premium-only plan may seem the perfect way to strike that balance — except for employees who opt out. Typically, a participant can expect to save 20% to 40% on total taxes for all dollars put into the plan. The amount that the employee decides to put into the plan must be chosen each year.
Income allotted to cafeteria plans is taken directly from an employee’s paycheck before taxes are taken out. These pre-tax contributions can save the employee hundreds—possibly even thousands—of dollars in income taxes and Social Security and Medicare taxes over the course of a year.
Cafeteria plans are so commonplace that the origins of this treatment and the attendant requirements are often ignored, particularly among small businesses. Cafeteria plan benefits come in various forms, including health and life insurance, dependent care and adoption assistance, accident insurance and health savings accounts. Each benefit has its own tax implication; not all benefits are excluded from the same taxes. For example, no federal income tax, Social Security tax or Medicare tax comes out of your health insurance premiums. However, your life insurance premiums on coverage over $50,000 are subject to Social Security and Medicare taxes, but not federal income tax. Boxes 1, 3 and 5 of your W-2 respectively stand for your federal, Social Security and Medicare taxable wages. Your cafeteria plan premiums aren’t included in the taxable wages of those boxes if they aren’t subject to the tax.
What is the contract called that is issued to an employer?
(A single contract for Group Medical Insurance issued to an employer is known as a master policy.)
The “election” amount is deducted from the employee’s paycheck automatically for each payroll period. Section 125 is part of the IRS Code that allows employees to convert a taxable cash benefit into non-taxable benefits. Under a Section 125 program you may choose to pay for qualified benefit premiums before any taxes are deducted from employee paychecks. A section 125 cafeteria plan offers a cost-effective benefits plan for companies; it can help businesses save money while keeping employees happy. Due to the complexity of these plans and their compliance issues, contact a benefits administration professional who specializes in creating and administering these types of plans. Unlike the federal mandate, employers with 250 or less employees are also required to report the total cost of employer-sponsored health care coverage.
In addition to the tax benefits to employees who will have less taxable gross income under a POP, employers also benefit by saving payroll taxes on the employee salary reductions. Employers can choose to set up “cafeteria plans” under section 125 of the Internal Revenue Code for a variety of reasons. These cafeteria plans allow employees to set aside pre-tax income for certain employer-offered benefits. Benefits provided by plans covered under section 125 include adoption and dependent care assistance, health insurance, 401k and group term life insurance policies.
Your employer doesn’t include your pretax payments in your taxable wages on your annual W-2. It may, however, choose to report certain benefits on your W-2 and code them as Café 125. In some cases, cafeteria plan reporting on your W-2 is mandatory.