Section 125 Information & Small Business Health Insurance Guide
- What is a Section 125?
- Who is eligible for a Section 125?
- Who is eligible to participate in a Section 125 plan?
- What are the benefits of a Section 125 plan for employers?
- What are the benefits of a Section 125 plan for employees?
- What are the requirements of a Section 125?
- Why establish a Section 125 Cafeteria plan vs. Section 105 or Health Savings Account 125 plan?
- How much can I save in taxes with a Section 125?
- How do I participate in a Section 125?
- How much can I contribute to a Section 125 plan?
- What are eligible medical expenses?
- How do I get started with a Section 125?
What is a Section 125?
A Section 125 Cafeteria Plan sometimes known as a Flexible Spending Plan allows employees to pay for certain medical expenses on a pre-tax basis. By paying for these expenses before being taxed, employees lower their taxable income, pay less in taxes and increase their take home pay. These expenses include:
- Employee contributions toward medical-related insurance premiums.
- Medical-related expenses such as deductibles, co-insurance, co-pays, or uninsured medical expenses.
- Dependant care expenses.
Who is eligible for a Section 125?
Currently the Internal Revenue Code supports C corporations, S corporations, limited liability companies (LLC’s), partnerships, sole proprietors, professional corporations and non-profits for Section 125 plans.
Who is eligible to participate in a Section 125 plan?
Employees can be eligible to participate in a Section 125 plan if they work for an employer who has a plan in place. An employee would need to qualify by the employer’s requirements to be eligible. Companies from one employee, one thousand employees, or any size are all eligible for Section 125 plans.
What are the benefits of a Section 125 plan for employers?
An employer saves the matching 7.65% (FICA) on every dollar that an employee runs through a Section 125 plan. Employers are also able to realize other benefits such as:
- Cost Control – An employer can control the company’s share of medical costs, without limiting employee choices.
- Address the needs of a diverse workforce – An employer can offer individually tailored benefits at little or no additional cost to the company.
- Recruit and Retain Quality Employees – An employer is viewed in a positive light by current and prospective employees because of a benefit package is being provided with the employee’s interests in mind.
- Depending on the particular state, there may also be a workers compensation tax savings.
What are the benefits of a Section 125 plan for employees?
Benefits of a Section 125 plan are paying for medical expenses or dependant care with pre-tax or tax-free dollars. Conservatively, employees can save 15% to 35% on federal income taxes alone that they set aside in a Section 125 plan. When factoring in city, state, Social Security and Medicare (FICA) the tax savings are a huge plus for today’s family’s to increase cash flow and to help defray the high cost of medical insurance and dependant care.
What are the requirements of a Section 125?
An employer retains the ability to set the requirements of a Section 125 plan. Probationary periods, hours worked per week, years of service worked and age requirements are all options for the employer to set as requirements of a Section 125 plan. Utilizing our free counseling services will empower you in making sure you choose the most effective plan options and put you in compliance with IRS requirements.
Why establish a Section 125 Cafeteria plan vs. Section 105 or Health Savings Account 125 plan?
Although each has their respective benefits depending on the tax situation, the Section 125 Cafeteria plan has no limit on the contributions by either the employee or employer; covers dependant care; covers transportation costs; and has no medical insurance restrictions. Money in the Section 125 plan may not be carried over to the next plan year.
Conversely, the Health Savings Account (HSA) is imposed a limit on funding, does not cover dependant care or transportation costs and must be tied to a High Deductible Health Coverage plan. Money in a HSA plan may be carried over to the next plan year.
How much can I save in taxes with a Section 125?
An employer saves $.0765 on every dollar pre taxed by an employee. Employees save $.30 on every dollar pre taxed. On average and employer can save $300 per employee in payroll taxes.
How do I participate in a Section 125?
An employee would determine at the beginning of the plan year what funds they would like to contribute on a pre-tax basis into the Section 125 account. Once per pay period a portion of that number will be sent to the Section 125 account. When an employee has a medical or daycare expense, the employee would simply submit the expense to the Section 125 plan administrator and would receive their tax-free dollars in the mail or by direct deposit from the Section 125 plan administrator.
How much can I contribute to a Section 125 plan?
For medical expenses, an employer and the Section 125 plan administrator set a limit that can be contributed to the Section 125 plan account. There are no set limits as defined by the Internal Revenue Service. There is however, a cap for dependant care set at $5000 per family per year.
What are eligible medical expenses?
View Eligible Medical Expenses for section 125 plans.
How do I get started with a Section 125?
- Our plan document services provided by TASC, pioneered the use of Section 125 plans, allowing businesses to save money on healthcare and other out-of-pocket medical expenses. TASC provides a long-term, value-oriented approach to your Section 125 plan. However it’s measured – dollars and cents or reduction of late-night headaches and worries – TASC provides consummate value to our clients and providers.
- A true commitment to low overhead with a no-nonsense approach helps keep our fees low and makes our service affordable.
- Our document service partner offers well seasoned financial professionals with years of experience. We offer an unparalleled level of customer service. We stand behind our services and make sure everything is exactly right.
- An endorsement of technology. From on-line communications to faster processing to the Benefits Debit MasterCard, we recognize the importance of technology in making many aspects of business more efficient. We continue to use these methods as a way to save time, save money, improve processes and generally make things easier.
- A promise. As we head into the future, you can count on our growth and innovation to raise the level of our services in every regard. Our goal remains to continually increase customer satisfaction.
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