IRS code allows for employers to implement a pre-tax Section 125 Cafeteria Plan as an employee benefit. This plan allows for unreimbursed insurance expenses to be paid pre-tax. Examples include insurance premiums, doctors office co-pays, prescription co-pays, eye exams, eye glasses, contact lenses, laser eye surgery, orthodontics, and more...Implementing a Section 125 Cafeteria Plan will strengthen your benefits program, save your company FICA taxes, and save participating employees 17% to 40% in taxes (depending on their income tax bracket). What other benefits can you implement that strengthen your benefits package and you can do so with little or zero out-of-pocket dollars?
If your employees are paying any portion of
monthly insurance premiums, then to save FICA taxes, implement Premium Only Plan (POP) portion of a pre-tax 125 plan. A POP allows for employees to pay their portion of group insurance premiums on a pre-tax basis and is a good start to saving taxes for you and your employees. You will save FICA taxes while saving your employee 17% to 40% on dollars they're already paying.
With a POP there is no real ongoing administration as you'll use payroll to take care of dollar flow's. Discrimination testing is a requirement that will need to be performed at least once at beginning of each plan year to ensure your plan is in compliance.
To take your pre-tax 125 plan to next level means implementing Flexible Spending Accounts (FSA) portion of a pre-tax 125 plan. Generally, there are two FSA accounts including a Medical FSA (medical / dental / vision) and a Dependent / Elder Daycare FSA.
These FSA accounts will allow for unreimbursed out-of-pocket expenses to be paid on a pre-tax basis. Examples include dependent daycare, office co-pays, prescription co-pays, eye exams, eyeglasses, contacts, orthodontics, and more.
