Use your "back" arrow to return to this listing.

What is Section 125?

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 pre-tax basis. Pre-tax benefits lower payroll-related taxes for both the employer and employees.

Section 125 offers several alternatives; three of the most common are Premium Only Plans, Cafeteria Plans, and Flexible Spending Accounts.

Premium Only Plans. This alternative is the most basic use of Section 125. Employees can pay for benefits on a pre-tax basis, thus lowering their taxable income.

Cafeteria Plans. This alternative gives employers the opportunity to gain control over their benefit expenditures through a “cafeteria” or menu-like plan.

A Cafeteria Plan is the most complex alternative because it changes the way employees receive benefits. Instead of providing a determined set of benefits (such as a medical plan and $50,000 of life insurance), each employee is given an amount of “benefit dollars” roughly equal to the employer’s expenditure for that person’s benefits. The employee then chooses from a menu of benefits and determines those that best fit his or her needs. Of course, the employer determines the available options.

Although a Cafeteria Plan is more expensive to implement, employers ultimately save money through the more efficient plan design, as well as the tax-effective and cost effective vehicles of delivery.

Flexible Spending Accounts. This alternative provides for the use of Flexible Spending Accounts, also called Reimbursement Accounts. Similar to the Premium Only concept, Spending Accounts are a means for employees to pay for certain out-of-pocket health care or dependent care costs on a pre-tax basis.

What are Flexible Spending Accounts? FSA's

A Health Care Spending Account (HCSA) is used to pay for almost any genuine medical expense not covered by a group plan (either medical, dental or vision).

A Dependent Care Spending Account (DCSA) is used to pay for those costs of dependent care that enable the employee to work. This care may be for a child under the age of 13 or a spouse or other adult dependent who is incapable of self care, such as an invalid parent.

For either of these Spending Accounts, the employee sets aside a predetermined amount through regular pre-tax salary reductions. The employee is reimbursed for all expenses up to the amount he or she has deposited (or in the case of HCSA, to the amount he or she has elected to deposit).

Planning is the key: CAUTION (Use-it-or-Loose-It Rule) unused amounts are forfeited and revert to the employer to offset administrative costs or are given back to participants on a pre-capita basis.

What are the Advantages of Section 125?

Universal appeal. Section 125 is for every company that wants to:

• Share the cost of benefits through employee contribution

• Offer Spending Accounts

• Implement a “cafeteria”-style benefits plan

• Gain greater control over escalating benefits costs

New Benefits. Employees can be given new benefits choices, such as the opportunity to have a Health Care and/or Dependent Care Spending Account.

Employers can also implement a means for employees to make any contributions to their coverage on a pre-tax basis merely by adopting a plan document that allows for this feature.

Tax savings. Both employees and employers save on taxes and therefore increase their spendable income.

Employees reduce taxes because the pre-tax contributions toward premiums or Spending Accounts are not subject to federal, state, or social security taxes. Employees save from $.25 to $.49 in taxes for every dollar they contribute or set aside.

Employers save on the employer portion of FICA, FUTA, SUTA and Workers’ Compensation premiums.

Benefit enhancements. Employees receive benefit improvements at a time when such improvements are unlikely, due to cost pressures.

Employer appreciation. Employers experience a renewed appreciation from their employees. The company, in effect, is giving the employee a “raise” without the cost of the raise coming from the employer.

Does the organization need to change its existing benefits plan?

No. One of the best things about Section 125 is that the company does not need to modify its current program. The addition of Section 125 is an enrichment, not a change. Many employers find, however, that implementing the program provides an excellent opportunity to make benefits plan changes that have been under consideration.

What about administration?

The proper introduction of a flexible benefits plan depends largely on the ability to administer the plan. Plans that provide for pre-tax employee contributions require a plan document. Spending Accounts will be handled in-house using the system we provide, you write the checks with our guidance.

The main advantage of these programs, vs. regular employee benefits, are the tax savings realized by both employees and their employer. Utilizing a Cafeteria Plan an employee can spend the same money for the same benefits they currently have and receive more take home pay! Below is an illustration of an employee's monthly take home pay before and after implementing a Cafeteria Plan.

What is the cost?

Very little. For most employers, the cost of implementing a Section 125 plan is recovered through tax savings during the first year.

Do-It-Yourself Packages:

(POP) You can begin saving money as early as next month for just *$95 (one time fee) with the installation of a Premium Only Plan (POP). We provide the Model Plan Documents, SPD's. Enrollment Forms (3-part) are also provided (no extra charge up to 25 employees, over 25 is additional .25 each).

(FSA) If Flexible Spending Accounts, FSA's, are desired, complete self-installation can be accomplished for *$150 (one time fee) including Model Plan Documents, claims tracking system and SPD's. There are no ongoing administrative costs per participant per month or monthly minimum fees. Enrollment forms are also provided (no extra charge up to 25 employees, over 25 is additional .25 each).

* The above fees may be waved if your company allows our agency, associate agency or associate agents to market additional "Voluntary Insurance Products" to your employees through voluntary payroll deductions at no cost to you.

How can we get started?