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How Health Care Reform Affects Section 125 Premium Only Cafeteria Plans January 1, 2014
By: Gene Ennis
September 11, 2013, Bradenton, FL
Today, Core Documents, the leading provider of affordable Section 125 Cafeteria Plan Documents to small employers, published new information on How Health Care Reform Affects Section 125 Premium Only Plans January 1, 2014. The good news is Core Documents expects Section 125 Premium Only Plans to remain a viable employer and employee tax favored program after Healthcare Reform, and for years to come, with only minor changes described below.
A Section 125 Premium Only Plan (POP) is an essential benefit that still allows employees to pay their portion of health insurance, and other ancillary insurance premium on a pretax basis. Employees save 22% to 40% of premium cost in reduced tax liability, depending on their tax bracket. Employers also save between 7.65% and 10% by eliminating matching federal unemployment (FUTA) and social security (FICA) taxes and possibly workers’ compensation cost. It really is a “win-win” solution with no downside for the employer. Both the employer and employee save money. A plan document and summary plan description is required by the IRS and Department of Labor before pretax deductions are taken. This is a benefit that actually reduces employer overhead and employee benefit cost. Core Documents provides employers with affordable ACA compliant Section 125 Premium Only Plan Documents at www.Core125.com.
New Code Excludes (Only) Individual Health Coverage from a State Exchange
Under current Internal Revenue Code (Code), the term “qualified benefit” is broadly defined to cover most group and individual insurance premium such as medical, dental, vision, ancillary, and group term life insurance. Beginning January 1, 2014 the Affordable Care Act (ACA) adds a new section 125(f)(3) to the Code that excludes (only) individual insurance premium offered through a State Exchange. All other types of individual health insurance premium outside the State Exchange program can still be deducted using a Section 125 Premium Only Plan.
The ACA provides federal funds for States to establish and administer two types of Exchanges – American Health Benefit Exchanges or Individual Insurance Exchanges, and Small Business Health Option Program Exchanges or SHOP Exchanges. Individual Insurance Exchanges will help people purchase individual health insurance coverage, and SHOP Exchanges will help qualified employers purchase group health insurance coverage.
State Exchanges will only sell qualified health insurance plans. Qualified means health insurance plans that cover essential health benefits, meet specific cost-sharing rules, and satisfy actuarial requirements. Plan design options will include the bronze, silver, gold, platinum, and a catastrophic plan for those under age 30 to make it easier to compare benefits and cost.
The reason individual health insurance offered through a State Exchange is being excluded as a qualified benefit under Section 125 is because the premium is subsidized by the government. To deduct a federally subsidized premium through a Section 125 Plan would constitute what the IRS refers to as “double-dipping”. So only subsidized individual insurance premium offered through the State Exchange will be excluded.
New Code Allows Group SHOP Exchange Insurance Premium Deductions via Section 125 POP
The new section 125(f)(3) Code eliminating (only) individual health insurance offered through a State Exchange does provide an exception – the new rules do not apply to employer group health insurance plans offered from a SHOP Exchange. New Code section 125(f)(3)(B) provides the exception that allows qualified employers to use a Section 125 Premium Only Plan to pretax group health insurance premium purchased from a SHOP Exchange.
Core Documents has been providing Section 125 Cafeteria Plan Documents starting at only $99 since 1997. See more information about Section 125 Premium Only Plans, Health FSA Plans, and Dependent Care FSA plans at www.CoreDocuments.com, or call us toll free at 1-888-755-3373. Qualified benefit consultants are standing by to answer all your questions and help you design an affordable ACA compliant plan document specifically for your company.