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.