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If your company offers its employees benefits, chances are that you have heard of Section 125 plans, even if you don't fully understand what they are. Essentially, Section 125 is part of the IRS code and includes plans that enable employers to offset increases in insurance premiums by minimizing payroll tax liabilities. These plans also give employees the option to withhold portions of their salaries on a pre-tax basis in order to cover the costs of qualifying medical expenses, insurance premiums, and dependent care expenses. The plan allows employees to convert their taxable benefits, such as their salary, to non-taxable benefits. It's effective way to offer employee benefits that allow businesses to save as much as $100 per employee.
There are a number of different employee plans implemented across the United States, but the Section 125 plan has been in operation since 1978 and offers numerous advantages. These plans do not exist for individuals and must be offered by employers.
Benefits of Section 125 plans
Section 125 plans are free from state and federal income tax. The benefit is that this reduces an employee's taxable income, increasing their take-home pay. These plans also reduce employee gross income for income tax purposes. In this case, the employer can enjoy a good reduction in the overall payroll liability, since the employer can eliminate matching FICA taxes of up to 7.65 percent for a saving of up to $115 on FICA per employee. This level of savings means that the Section 125 plan pays for itself. The initial opening cost is also low. Depending on the state in which the business operates, this can also eliminate workers' compensation.
In many cases, an employer's savings can increase to as much as 20 percent for each dollar that passes through the Section 125 plan. In turn, employees save up to 40 percent, depending on their specific tax brackets. Employees decide how much money they contribute to the plan, which is deducted directly from his or her paycheck each payroll period.
Points to Consider before Implementing Section 125 plans
- Plan document: Before implementing a Section 125 plan, you must first establish a plan document that outlines details such as a description of employee benefits covered by the plan, annual limits, participation rules, eligibility, employer contribution, and election procedures.
- Summary plan description: Includes important plan details, information concerning the administration and sponsorship of the plan, and claim filing procedures. Every participant must receive the summary plan description.
- Ongoing compliance: Before implementing a Section 125 plan, ongoing plans must be attended to effectively. Failure to do so may eliminate the tax-free status of all benefits provided under the plan.
Sample Cost of Implementing Section 125 plans
While it is easy for employers to implement Section 125 plans within their businesses or in-house, most opt to outsource these services. Not only is outsourcing convenient, it also allows employers to take advantage of Section 125 tax-advantaged medical or healthcare solutions. Some companies charge minimum monthly charges for small employers while others don't. Typically, the cost of implementing Section 125 plans varies based on the service selected and the number of employees or group size. Also, costs vary depending on the plan you chose. There are two basic plans of Section 125. They are:
- 1.A premium only Section 125 plan
- 2.A full Section 125 plan
Here are the estimated prices of the cost of Section 125:
- An employer who has a group size of between 1 and 5 employees will require a setup fee of $9 and a monthly fee, plus another $9 per employee, per month
- Employers with 6 to 10 employees pay a setup and monthly fee of $8.50 per employee
- Employers with 11 to 19 employees pay a setup and monthly fee of $8.00 per employee
- Employers with 20 to 100 employees pay a setup and monthly fee of $7.00 per employee
- Employers with over 100 employees pay a setup and monthly fee of $6.50 per employee
- The plan document and all the forms have a one-time cost of $200 to $600
- Payroll providers can charge you a fee of $400 to $600
- Premium only plan can cost you a price of $80 to $100