Internal Revenue Service Code, Section 125, allows employees to purchase health insurance and other accompanying benefits tax-free. Also known as a POP or Cafeteria plan, the Section 125 Plan is an integral part of any small business owner’s employee benefit package.
Core Documents provides employers with everything they need to establish an IRS- and DOL-compliant Section 125 benefits plan in PDF format for just $99. This cost reflects a one-time setup fee, not an annual charge. For an additional $50, employers can choose the Deluxe Binder option that includes the PDF email version plus a printed plan document in a 3-ring binder.
The following Q&A is presented to provide the basics of how a Section 125 plan works and who benefits from having one. At the end of the article is a link to download a free employer’s guide, and right after that is a video presentation on the Core 125 plan document.
By using a Section 125 Plan, employees avoid paying any income tax on qualifying premiums. Instead, the premium is deducted before the taxes are calculated. This means an employee doesn’t have to make $300 in order to pay a $200 insurance premium because the tax liability is immediately eliminated.
Utilizing a Section 125 Plan makes qualifying insurance premiums more affordable to your employees, where they can save 23%-40% of their pretax Section 125 premium deductions just in federal income tax alone.
The actual tax savings are on city, state, and federal income taxes (including Social Security and Medicare taxes). Under a Section 125 POP Plan an employee’s take-home pay is substantially increased, which in turn helps to reduce the high cost of providing health care coverage for family members.
A Section 125 Premium Only Plan is unique in that it is one of the few employee benefit plans that will continually pay dividends back to the employer.
A Section 125 Plan does this by eliminating the 7.65% in employer-matching Social Security and Medicare taxes, in addition to some Federal and State unemployment taxes. Depending on the state, employers may also be eligible for workers compensation savings.
The bottom line is: employers who establish Section 125 Plans recoup the small $99 one-time setup fee quickly and then continue to realize tax savings year after year.
Employees of regular corporations, S corporations, limited liability companies (LLCs), partnerships, sole proprietorships, professional corporations, and non-profits can all reduce payroll taxes by establishing a Section 125 Premium Only Plan.
While the Internal Revenue Code prohibits a sole proprietor, partner, members of an LLC (in most cases), or individuals owning more than 2% of an S corporation from participating in the Section 125 POP Plan, owners can still benefit from the savings on payroll taxes by sponsoring a plan for their employees.
Contrary to popular belief, a Section 125 Premium Only Plan can be started at any time of the year.
Ideally, you want to establish a Section 125 Plan when your group health insurance renews, as rates typically increase then. This gives your group a chance 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, but you prefer a calendar Plan Year from January 1st to December 31st. You could start a short Plan Year on June 1st and end the first short Plan Year on December 31st. After December 31st your Section 125 Plan will be on a calendar year from January through December.
If you already have a Plan you started years ago, you can amend and restate the Plan at anytime. Our order forms address both 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 2012, Core Documents would be glad to help you update it as soon as possible. Between changes in the IRS Code and new laws, today’s Plan Document is almost 15 pages longer than documents prior to 2012.
This question is asked more frequently than any other.
You’ll purchase a single-use license agreement for a Section 125 Premium Only Plan Document for either the Basic PDF version or the Deluxe Binder version. These are not fill-in-the-blank documents. Each Section 125 Plan document is specifically prepared for each client based on the information provided in the application, making your Plan totally unique.
In most cases you’ll receive your Section 125 Plan Document in PDF format via email within hours. If you choose the Deluxe option with 1” ring-bound notebook, it will normally be mailed the same day. You’ll receive a Resolution to Adopt the Plan, an IRS-required Section 125 Plan Document, a DOL-required Summary Plan Description, Election Forms, and a complete Administrative Section.* For a small additional fee you can purchase select documents on a CD disk so you always have a backup copy.
An outside administrator or software is not necessary to implement a Section 125 Premium Only Plan. Administration of the plan is very simple:
For your convenience, we provide you with a one-page summary of all Section 125 Plan Sponsor responsibilities. This 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.
Refund Policy: Purchaser understands that goods and services provided by Core Documents, Inc. are non-refundable. Orders cancelled prior to shipping are subject to cancellation fees that are applied to the cost of goods and services provided during the review, draft, and preparation of your order.
*Most documents go out via email within hours. Keep in mind that December, January, and February are our busiest months of the year and documents are processed in the order they are received. The Rush Order fee ($25) simply brings your document to the top of the stack to be processed immediately.