Your last pay stub for the year includes pretax deductions in your gross wages. The amount you get after reconciling your W-2 should usually match what’s on your pay sec125med stub. To offer you Section 125 benefits, your employer must establish a plan that meets Section 125 of the Internal Revenue Code.
Pros and Cons of Section 125 Plans
As far as §125 is concerned, NY regulations 20 CRR-NY 112.2 only require adjustment for plans “established by the City and certain other employers”. Offer health, dental, vision and more to recruit & retain employees. Overall, these drawbacks may not be as problematic as overpaying for other services.
Understanding a Section 125 Plan
Both employee participants and employer sponsors of section 125 plans receive certain tax exemptions related to employee pre-tax contributions. Additionally, plan contributions are typically not subject to Social Security tax or Medicare (the combined FICA tax) for the employee participant. Usually, what is reported there is your medical insurance premiums that are paid with pre-tax income.
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The third party administrator for a plan that includes FSA is also responsible for handling the processing of receipts that employees submit for legitimate FSA expenses like child care expenses. In addition to being tax advantageous, cafeteria plans can help employers attract and retain talent. Employees today place great emphasis on having access to flexible benefits that improve the well-being of themselves and their families. When choosing between two prospective employers, a section 125 plan could be the deciding factor. We are a health insurance company that acts as a broker for a select variety of health insurance plans and carriers.
We help set up your FSA, process claims daily, and provide plan documentation, compliance testing calculations, and reports to maintain your plan properly. Benefits shouldn’t be overwhelming, so let us do the heavy lifting. Many dual-purpose items are eligible, such as dietary supplements, orthopedic shoes, prenatal vitamins, and sunscreen. There’s also a large variety of eligible over-the-counter items. Allergy medicines, cold medicines, contact lens solutions, first-aid kits, pain relievers, pregnancy tests, sleeping aids, and throat lozenges are among the dozens of eligible items. Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018.
When setting up this type of plan, employee participants may have their healthcare premium payments taken out from their paychecks before taxes are deducted, which in effect reduces the amount of income used for tax calculations. If you’re thinking about adding this benefit, it’s important to note that a POP may only be offered by an employer with a group medical plan. Unlike contributions made to HSA and other tax-advantaged medicalaccounts, there is not a reporting requirement for cafeteria plans or FlexibleSpending Accounts (FSA) on your tax return. The money that is put into the section 125 or FSA is pre-tax money.
- It can be worth it to suggest that your employer set up such a plan or keep it in mind if you’re job hunting so you can potentially hire on with a company that does offer a cafeteria plan.
- As an employer, offering FSAs and HSAs to employees can help offset costs that health insurance plans don’t cover.
- Flexible spending account rules allow pre-tax deductions to be used to fund these applicable medical expenses and can lead to significant amounts saved each quarter and year.
- Employee benefits information integrates with our payroll technology, Paychex Flex®, and allows for a smoother data transfer across your business.
- Employees today place great emphasis on having access to flexible benefits that improve the well-being of themselves and their families.
Who Cannot Participate in a Section 125 Plan?
A section 125 “cafeteria” plan helps employees save money on qualifying expenses such as medical or dependent care through pretax dollars. A premium only plan (POP) is a type of section 125 plan which specifically allows employees to pay for health insurance premiums with pretax dollars. As with food service, a cafeteria plan allows employees to pick benefits from a menu of offerings. Any costs beyond the maximum your company will pay then become the responsibility of the employees, paid for via payroll deductions throughout the year.
It can be worth it to suggest that your employer set up such a plan or keep it in mind if you’re job hunting so you can potentially hire on with a company that does offer a cafeteria plan. In order to allow your employees to pay health insurance premiums on a pre-tax basis, you need to have what is referred to as a Section 125 Plan, in place. Section 125 is the section of the IRS tax code where the items that can be deducted from employee pay on a pre-tax basis are defined. In the context of Section 125, “pre-tax” means that a deduction is exempt from Federal Income Tax Withholding, Social Security and Medicare Taxes. The employer also saves, because a Section 125 deduction also reduces the employer’s portion of the Social Security and Medicare tax liability.
For example, if you knew that you were gross salary was $60,000, and you also knew that you paid $3000 in health insurance premiums, you would expect that box 1 would show $57,000 of income. A section 125 plan provides employees with an opportunity to receive certain benefits on a pre-tax basis. This money is taken out of the individual’s gross pay and can be used for items such as group health insurance premiums, qualified out-of-pocket medical expenses, and daycare for eligible dependents.
Section 125 plans do state that you must use any remaining funds in the account by the end of the year or the money is forfeited to your employer. But a carryover provision that was implemented in 2013 does allow plan participants to extend up to $500 of unused funds from one year to the next. A Section 125 program permits employees to pay for some expenses on a pre-tax basis. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance.
The name “Section 125” references that section of the IRS code. A Section 125 health insurance plan is also known as a cafeteria plan, allowing employees to pay certain expenses, such as health insurance, on a pre-tax basis. It also includes flexible spending accounts, and the employee may use the money in the FSA to pay for various medical-related expenses, including transportation to and from healthcare providers or dependent care. However, the IRS has a “use or lose” rule when it comes to FSAs, so the employee must take advantage of these funds annually or lose them. As the IRS puts it, “An FSA cannot provide a cumulative benefit to the employee beyond the plan year.” Qualified benefits under a Section 125 also include group life insurance coverage and adoption assistance. These deductions not only decrease the employee’s taxable income, but also reduce the employer’s payroll tax liabilities.
- Offered solely in conjunction with a group medical plan, an FSA benefit can help employees budget for predictable out-of-pocket medical expenses, such as co-pays, routine prescriptions, or dental care.
- To know whether Section 125 premiums count as taxable wages for state and local income tax, contact your state revenue agency or your employer’s payroll or human resources department.
- You notice that you have $100 remaining in the account at the end of the year.
The State Unemployment Tax Act (SUTA) provides benefits and programs to unemployed citizens. Cafeteria plans are only available through employers; individuals cannot purchase these plans from the marketplace. There are also some considerations for individuals who are the sole proprietor of a company, a partner, or shareholders who own more than two percent of the company.
A licensed insurance agent/producer or insurance company will contact you. Medicare Supplement insurance plans are not linked with or sanctioned by the U.S. government or the federal Medicare program. For instance, a young mother might be more interested in the child care assistance benefits, while an older employee might devote more money toward retirement.