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Pre-Tax Section 125 Plans — A look to the future

Celebrating 40 Years -- The Section 125 Cafeteria PlanOur series closes with a look at where pre-tax Section 125 Cafeteria Plans stand today and a look into likely future changes. Today, millions of companies of all sizes use pre-tax Section 125 plans to give both the employee and employer big tax savings on:

Immediate tax savings

Employees eliminate up to 40% in income and FICA taxes from the first dollar paid for group health premiums and out-of-pocket medical expenses. Prior to the introduction of pre-tax Section 125 Plans, employees could not get this tax break through salary deductions but had to claim it through the medical expense deduction on tax forms at the end of the year. That method denied employees the first 7.5% in medical expenses as well as FICA taxes as a deduction. Employers also save an average 8% to 10% on FICA, FUTA, and other payroll taxes, since pre-tax Section 125 employee-paid group premium and flex account contributions reduce the company’s overall payroll. What comes next for pre-tax Section 125 Plans?

Changes ahead for Pre-tax Section 125 Plans

One factor that is always up for change with pre-tax Section 125 Cafeteria Plans from year-to-year is the rate of savings available to participants. That’s because an employee’s tax bracket will change according to income and any changes in the brackets made by Congress will have an effect. Depending on how Congress moves ahead with health care reform, restrictions on pre-tax Section 125 Plan design may tighten or loosen. When the Affordable Care Act (ACA) came along, limits were put on the types of plans and options an employer could choose. If the ACA is reinforced, employers and employees may see further limits. If, on the other hand, consumer choice is the focus, the types of plans available within pre-tax Section 125 plans may relax a bit. Toward the side of consumer choice, the House has already passed two bills that will make HSAs and Health FSAs – flex benefit components of pre-tax Section 125 Plans – more useful and affordable. The state of the pre-tax Section 125 Cafeteria Plan is sound and its future bright. That’s true of anything that reduces our taxes and doubly so when it brings a powerful benefit like greater availability and consumer choice in health care. If you’re an employer wanting to know more about how to set up your group health benefits in a pre-tax Section 125 plan, send us an email, give us a call, or read more in the links below.

More in the Section 125 Plan’s 40th birthday series:

Learn more about pre-tax Section 125 Plans:

Watch Our Section 125 Plan Video:

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