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Section 125
Getting the most out of the IRS code!
Today's record-high costs for benefits are making it more expensive than ever for employers to provide quality benefits for their employees. Our team will work with your organization to implement cost-effective solution: Section 125 of the Internal Revenue Code. With Section 125, employers establish tax-advantageous programs that can significantly enrich their current benefits plans. As a result, controlling and maintaining benefits costs can be substantially improved, today and into the future.
What is Section 125
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Section 125 of the Internal Revenue Code, enacted by Congress in 1978, allows companies to give their employees the opportunity to pay for benefits on a pretax basis. Pretax benefits lower payroll-related taxes for both the employer and employees. Section 125 offers several options; three of the most common are Premium Only Plans, Flexible Spending Accounts and Cafeteria Plans.
Premium Only Plans
This plan is the most basic use of Section 125. Employees can pay for benefits on a pretax basis, thus lowering their taxable income and tax liability.
Flexible Spending Accounts
Spending Accounts are a means for employees to pay for certain out-of-pocket health care or dependent care costs on a pretax basis.
Cafeteria Plans
This alternative gives employers the opportunity to gain control over their benefit expenditures through a "cafeteria" or menu-like plan.
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What are Spending Accounts?
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With Spending Accounts, the employee and/or employer contribute a predetermined amount through regular pretax salary reductions.
Health Care Spending Account is used to pay for almost any genuine medical expense not covered by a group plan (either medical, dental or vision).
Dependent Care Spending Account is used to pay for the costs of dependent care that enable an employee to work.
(This care may be for a child or a spouse or other adult dependent who is incapable of self care. See FAQ Child and Dependent Care Credit & Flexible Benefit Plans)
Planning is the key: unused employee contributions are forfeited and revert to the employer to offset administrative costs or are given back to participants on a per-capita basis.
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What are the Advantages of Section 125?
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Universal appeal. Section 125 is for every company that wants to: - Share the cost of benefits through employee contribution
- Implement a cafeteria-style benefits plan
- Gain greater control over escalating benefits costs
- Tax savings. Both employees and employers save on taxes and therefore increase their spendable income.
- Employees reduce taxes because the pretax contributions toward premiums or Spending Accounts are not subject to federal, state, or social security taxes.
- Employers save on the employer portion of FICA, FUTA, SUTA and Workers' Compensation premiums.
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