Benefit Design can help you implement an innovative and cost-effective benefit management tool- Section 125 of the Internal Revenue Code. With Section 125, employers have the power to establish tax-advantaged programs that can significantly enrich their current benefit plans while substantially improving, controlling and maintaining costs.
Here are two of the most popular options under Section 125:
Premium-Only Plans (POP)
This is the most basic Section 125 Plan option. Employees pay for their share of the medical insurance premium using pre-tax dollars, thereby lowering their taxable income and potentially saving them a significant amount of money. The taxes saved by the participating employee are federal income tax, state income tax, and FICA tax. This generally results in a total tax savings of approximately 28.5% on the portion of the salary used to pay for medical insurance premiums. The taxes saved for the company are the matching portion of the FICA tax and FUTA tax (Federal Unemployment Tax). This results in a savings to the employer for each employee enrolled in the plan.
Who can sponsor a POP Plan? Regular Corporations, Partnerships, S-corporations, Limited Liability Companies, Sole Proprietors, Professional Corporations and Not-For-Profits can all save money on payroll taxes with a POP plan. While regulations prohibit a sole proprietor, partner, members of
an L.L.C. (in most cases), or individuals owning more the 2% of an S-Corporation from participating in the POP Plan, they may still sponsor a plan and benefit from the savings on payroll taxes.
Flexible Spending Accounts
This popular Section 125 option is similar to the POP plan concept. Spending accounts are a means for participating employees to pay for approved out-of-pocket health care or dependent care costs on a pre-tax basis. There are two types of spending accounts that can be established: Health Care Reimbursement Accounts and Dependent Care Reimbursement Accounts.
Participating employees establish and fund Health Care Reimbursement Accounts with pre-tax dollars from their salary. Employees have the opportunity to decide how much money they want in their account and then elect to have this money deducted from their salary. When the employee incurs approved healthcare expenses they are able to withdraw money from their Health Care Reimbursement Account to cover the expenses. The benefit of the Health Care Reimbursement Account is that funds are not taxed when they are withdrawn, thus giving the employee tax-free money to pay for approved expenses.
Dependent Care Reimbursement Accounts are established in a similar fashion. Employees have the opportunity to decide how much money they want in their account and then elect to have this money deducted from their salary on a pre-tax basis. When the employee incurs approved dependent care expenses they are able to withdraw money from their Dependent Care Reimbursement Account to cover the expenses. The benefit of the Dependent Care Reimbursement Account is that funds are not taxed when withdrawn, thus giving the employee tax-free money to pay for approved expenses.
There are some limits to the amount of money that can be put into the flexible spending accounts. Benefit Design can provide resoucres for you to develop your plan.
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