To pre-tax employee insurance premiums, you must have a plan document.

A Section 125 plan is defined as a “written plan” that documents the structure, rules, and sponsor information of the plan.

In other words, failure to have a plan document means there is not a compliant plan in place, and the employer’s pre-tax treatment of employee premiums violates tax law.

This requirement is often missed by employers setting up a group health plan for the first time. The insurance agent or accountant usually assumes the other takes care of it. Ultimately, it is the employer’s responsibility to make sure it is done.

Related: Do I need a Section 125 Premium Only Plan Document?

When you search online for, “Section 125 Plan Documents,” chances are good your search results will include web sites offering cheap or even free self-serve plan document templates.

Sounds good at first. After all, the whole point of setting up a Section 125 plan is to save money by eliminating income tax on insurance premiums. And what saves more than free?

Problem is, there is more to meeting the plan document requirement than changing the name and address on a form. Without a quick compliance review, your fill-in-the-blanks plan document may not be legally allowed to do what you intend.

To learn more about what free, one-size-fits-all plan documents can cost in the long run, read this blog post: Beware of “FREE” or self-serve Section 125 Plan Documents.

Employees avoid paying any income tax on qualifying premiums and contributions. Instead, it is deducted before the taxes are calculated. As a result, an employee doesn’t have to make $300 in order to pay a $200 insurance premium – the tax liability is immediately eliminated.

Tax savings come from city, state, and federal income taxes (including Social Security and Medicare taxes) and can mean a savings of 23%-40% of their pre-tax premium deductions in federal income tax alone.

This means that, under a Section 125 Plan, an employee’s take-home pay is substantially increased. This helps reduce the high cost of providing health care coverage for the employee and family members.

Yes. In fact, a Section 125 Plan is one of the few employee benefit plans that continually pays dividends back to the employer.

It does this by eliminating the 7.65% in employer-matching Social Security and Medicare taxes as well as 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 a Section 125 Plan recoup the small $99 one-time set-up fee quickly and then continue to realize tax savings year after year.

Eligible employees of regular corporations, S corporations, limited liability companies (LLCs), partnerships, sole proprietorships, professional corporations, and non-profits can all reduce taxes as part of an employer’s Section 125 plan.

Employers set eligibility guidelines according to permitted employee classification rules. For example, full-time vs. part-time or seasonal.

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 directly participating in the plan; however, owners still benefit from payroll tax savings when sponsoring a plan for their employees.

The basic Section 125 Plan Document allows an employer to offer pre-tax salary deductions to employees to pay group health plan and other insurance premiums through the plan. Basic premiums beyond health insurance can include dental or vision coverage, group term life, disease-specific insurance, long-term care, and more.

However, the employee is not required to take any particular policy or benefit but may pick and choose, as you would put the items you want on your tray in a cafeteria line.

Learn which premiums can or cannot be deducted: Pre-tax eligible premiums for Section 125 plans.

Yes. Employers can expand cafeteria-style options by adding a Health Flexible Spending Arrangement (FSA), Dependent Care Assistance Plan (DCAP) FSA, and a Health Savings Account. And, adding any or all of these to a Section 125 plan provides the same tax savings on pre-tax employee contributions as on pre-tax premiums.

Learn more: Section 125 cafeteria plan options.

The Core125 Plan Document package comes in .pdf format. It is emailed to you, usually within 1 business day. The Deluxe Version adds a printed version of the package in a 3-ring binder sent the same day via Priority Mail.

Every Core125 package includes the following materials, all customized for your company and plan:

• Section 125 Premium Only Plan Document
• Corporate Resolution to Adopt a Section 125 Plan
• Administrative Handbook
• Summary Plan Description (SPD)
• Premium Election Form

Deluxe Binder Edition

For a description of each item, see: Core 125 POP Plan
Document package.

Contact Us

Want to make sure you’re choosing the tax-saving options best for your particular situation? Get in touch with an expert on Section 125 plan design. Send us an email or call our friendly, knowledgeable staff at 1-888-755-3373.