Section 125 Premium Only Plans
Sometimes referred to as "POP", these plans reduce income tax liabilities for both the employer and employee. IRS Section 125 allows employees to make special salary deduction elections to pay their portion of medical insurance premiums using pretax or tax-free dollars. That means that the employee saves FICA, federal and state taxes and the employer saves on FICA, FUTA and SUTA. We provide employers with everything they need to establish a Section 125 POP Plan
Benefits from using a Section 125 - Premium Only Plan
Employees save 22.65% to 40% of their pre-tax Section 125 premium deductions in just federal income taxes alone. The actual tax savings are on local state, and federal income taxes, including Social Security and Medicare taxes based on employees’ deductions for insurance premiums. Under this plan, employees take-home pay is increased, which helps reduce the high cost of health coverage.
Savings to Employees
Based on an employee contributing $1,000 per month to their various insurances, and approximately a 30% tax rate (FICA 7.65% + Federal 20% + State 2-3%). $1,000 x 12 months = $12,000 per year in insurance contributions that can be taken as a pre-tax deduction. The resulting reduction in employees’ taxes of approximately $3,600 per year effectively increases their net pays.
How EMPLOYERS Benefit from a Section 125 Premium Only Plan.
Employers benefit by reducing the matching Social Security and Medicare taxes, and sometimes Federal and State unemployment taxes.
Savings to Employers
$12,000 (employee pre-tax deduction as detailed above) x 7.65% (employer FICA) = $918 in annual TAX SAVINGS per employee to you, the employer.
Frequently Asked Questions
How it is Administered
Who Can Participate
When Should I Start
What if I Already have a Plan
Administration of the plan is very simple. An outside administrator or software is not necessary to administer a Section 125 Premium Only Plan.
You will receive your Section 125 Plan in a one inch ring bound notebook with a Resolution to Adopt the Plan, an IRS required Section 125 Plan Document, and a DOL required Summary Plan Description, Election Forms, and a complete Administrative Section. For a small additional fee you can purchase some of the documents on a CD disk.
Every employee should receive a copy of the Section 125 Summary Plan Description and an Election Form. Election Forms should be signed by employees for specific approved deductions and kept on file. For your convenience we provide you with a one page summary of all Section 125 Plan Sponsor responsibilities. The document does not have to be filed with the IRS or the DOL, or any other government entity. Annual 5500 reporting was suspended in 2002 and is no longer required for small employers.
You will be required to conduct Section 125 non-discrimination testing annually. We will include DIY discrimination testing forms to assist you in this process. You'll need to sign the Section 125 Plan Document in two places and have it available in the event of an IRS audit, if the DOL asks to see a copy, an employee asks to view the document, or you need to refer to it for administrative guidance.
Who Can Participate in a Section 125 Premium Only Plan?
Employees of regular corporations, S corporations, limited liability companies (LLCs), partnerships, sole proprietors, professional corporations, and not-for-profits can all reduce payroll taxes by establishing a Section 125 Premium Only Plan. While the Code prohibits a sole proprietor, partner, members of an LLC (in most cases), or individuals and spouses owning more than 2% of an S corporation from participating in the Section 125 POP, owners may still benefit from the savings on payroll taxes by sponsoring the plan for their employees.
When Is The Best Time To Start a Section 125 Premium Only Plan?
Contrary to popular belief a Section 125 Premium Only Plan can be started any time during the year. The best time to establish a Section 125 plan is when your group health insurance plan renews. Because most groups receive rate increases at renewal this is the ideal time to allow employees to sign a new Section 125 Election form prior to the new Plan Year. It is also quite acceptable to start a new short Plan Year anytime. For example, it's May, and you prefer a calendar Plan Year from January 1 to December 31. You can start a Short Plan Year on June1 and end the first Short Plan Year on December 31. After December 31 your Section 125 Plan will be on a calendar year from January through December.
What About Existing Section 125 Plans Already In Place That Need To Be Updated?
If you already have a Plan which started years ago, you can amend and restate the Plan anytime. Our order forms address the amended and restated document dates. We simply need the original start date of your old plan so we can maintain the continuity back to the original start date. It's not unusual for a group to misplace a Plan Document and need to replace it. This is a good time to update the old plan with current plan documents. If your document was written before 2002, it certainly needs to be updated as soon as possible. So many changes have taken place in IRS Code, as well as new laws, that today's Plan Document is almost 15 pages larger than documents prior to 2002. This means you may be making administrative decisions based on outdated information.
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