Do you need a Section 125 Plan Document? Get one today!
IRS Requirement for pre-taxed employee benefits
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.
In most employer-sponsored group benefit plans, employees pay for health insurance and other qualified benefits with tax-free dollars. It's just taken for granted; that's the way it's done.
However, that tax-advantaged treatment is not automatic. The employer must do it through a Premium-Only Plan (POP) or Cafeteria plan, and to set up one of those, you need a Section 125 plan document.
Tax savings for everyone with a plan document
A Section 125 Premium Only Plan document allows your employees to voluntarily agree to a "salary reduction" so that the employer can pay their insurance premium as a business expense.
The portion of the insurance premium the employee is responsible for is deducted right off the top of income before taxes are calculated. This saves the employee $ .25 to $ .40 on every dollar paid in insurance premiums.
Employers also realize tax savings from reduced matching FICA, FUTA, SUTA, and Worker's Compensation taxes on all tax-advantaged employee funds.
This tax savings usually more than covers the costs associated with setting up a plan and administering it. Plus, employees are happy because they experience a "raise" when withholding tax is lowered.
A Section 125 (POP or Cafeteria) plan is "a written plan"
Section 125 is part of the U. S. Code where the Treasury (IRS) lays out the rules for employers wanting to allow employees the option of pre-tax salary deductions to pay group health and related insurance premiums.
The formal definition of a Section 125 plan to pre-tax benefits says:
Section 125 (d) Cafeteria plan defined
For purposes of this section—
(1) In general
The term “cafeteria plan” means a written plan under which—
(A) all participants are employees, and
(B) the participants may choose among 2 or more benefits consisting of cash and qualified benefits.
Understanding "qualified benefits"
Qualified benefits are defined as "not includible in the gross income of the employee" (ref. Section 125(f)). In other words, the premiums are tax-free within a POP or Cafeteria plan.
Those benefits include group health insurance and supplemental benefits, such as group term life insurance, disease-specific insurance, accidental death insurance, and others.
I was contemplating on getting a 125 plan i.e. POP or Cafeteria Plan document. But your blog has cleared all my queries about it. Keep sharing such informative posts in the future as well.
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