Section
125
Section 125 Plans provide tax
savings by allowing employees to deduct insurance premiums
from their salary prior to calculation of federal income and
social security taxes. The tax savings is between 25% and
40% depending on the employee tax bracket. This is allowed
under Internal Revenue Code (IRC) Section 125.
Insurance premiums, including
supplemental benefits such as dental and vision coverage are
simply deducted pre-tax, or before taxes are calculated. Employees
who want to participate will be required to sign a Section
125 Election Form authorizing the employer to make the pre-tax
deductions.
Employees may elect to waive Section 125 at
the time they choose a qualifying insurance plan. Otherwise
pretax deductions can only be changed during the open enrollment
period, unless a qualifying event occurs such as birth, adoption,
death, or divorce, etc., see your Section 125 Summary Plan
Description for a complete list of qualifying events to change
a pre-tax payroll deduction.
The Section 125 Plan reduction does lower
the salary on which both Social Security and Unemployment
Benefits are calculated. If an employee is close to beginning
Social Security benefits they may wish to consider waiving
the Section 125 Plan for their medical premiums as the reduction
of Social Security taxes may reduce retirement benefits slightly.
Employers who wish to establish a Section
125 Plan to deduct insurance premiums pre-tax are required
by the Internal Revenue Service to establish a formal plan
document and a Summary Plan Description. Core Documents provides
employers with everything they need to successfully establish
a Section 125 plan for only $99.00 plus $15.00 shipping and
handling.
Administering a Section 125 premium only plan
is very simple. There are no forms to file with the IRS or
DOL. There are also no annual filings to make.. The IRS Form
5500 filing requirement was suspended in 2002. Employers simply
need tohave the required plan document on hand in the event
of an audit. Once annually the plan or Core Documents should
conduct a simple test to determine that the plan is not discriminating
in favor of highly compensated or key employees. Owners also
can not generally participate in a Section 125.
Please click the link in the right blue side-bar
titled "125 POP Plan" for more information on Section
125 Plans. |