Employer sponsored flexible spending accounts (FSAs) are benefit plan arrangements that Premium-only (“POP”) plans have been a popular way for employers to help employees obtain favorable tax treatment for their share of premiums for health insurance and other qualified benefits. POP plans provide a “win-win” solution - employees save by paying their share of insurance premiums on a pre-tax basis, and employers save by not paying FICA and federal unemployment taxes on those amounts.
The US Congress created Code section 125 in an effort to make benefit programs more affordable for employees.
Section 125 is part of the IRS Code that allows employees to convert a taxable cash benefit (salary) into non-taxable benefits. Under a Section 125 program you may choose to pay for qualified benefit premiums before any taxes are deducted from employee paychecks.
The Section 125 program is a tremendous opportunity for you to enhance your benefits package.
How employees benefit from a Section 125 Premium Only Plan
Employees avoid paying any income tax on premiums they pay through a Section 125 Plan. The premium is actually deducted before the taxes are calculated. This means an employee doesn’t have to make $300 in order to pay a $200 insurance premium because the tax liability is immediately eliminated. The Government allows this to help make insurance more affordable. Employees save 22.65% to 40% of their pre-tax Section 125 premium deductions in just federal income taxes alone. The actual tax savings are on city, state, and federal income taxes, including Social Security and Medicare taxes on all money employees use to pay for their portion of insurance premiums. Under a Section 125 POP employees take-home pay is increased which helps reduce the high cost of providing health coverage for family members.
How employers benefit from a Section 125 Premium Only Plan
A Section 125 Premium Only Plan is unique in that it is one of the few employee benefit plans that will continually pay dividends back to the employer. A Section 125 Plan does this by eliminating the 7.65% in employer matching Social Security and Medicare taxes, and sometimes Federal and State unemployment taxes. Depending on the state, employers may also be eligible for worker’s compensation savings.
The qualified premiums (if offered by employer) are:
- Employee Group Term Life (up to $50,000)
- Medicare Supplement
- Hospital Indemnity
- Disability (not recommended