Chances are you have the option of choosing from a Health Savings Account (HSA) or Flexible Spending Account (FSA) through your employer’s benefit package.  Especially if you have access to both, you probably have asked yourself the question, “Which is the best option for me?”

The short and simple answer to that question is, it depends.  The good thing though is that if you understand the pros and cons, both options are a great way to pay for qualified expenses with tax free dollars, thus increasing your take home and decreasing matching payroll taxes for your employer.

Analyzing the HSA

An HSA is a separate savings account set up for those who are enrolled in a qualified high deductible health plan (HDHP).  The IRS has set certain guidelines for these types of qualified plans.  In general they don’t cover any services outside of preventive care until a fairly high deductible has been satisfied.  With the increased up front exposure for those enrolling on the HDHP, the premium is greatly reduced, thus allowing an individual and/or employer to contribute any savings up to the IRS limit into the HSA pre-tax.  The dollars can then be used to pay for qualified medical, dental and vision expenses.

Analyzing the FSA

An FSA is a savings account setup by your employer for you to pay for qualified out-of-pocket medical, dental, vision and dependent day care expenses.  You do not need to be enrolled on any particular health plan with your employer to participate.  At the beginning of each plan year you make an educated assessment of your out-of-pocket expenses and then this amount is split up over each pay period.  The money is taken out of your paycheck and deposited into your account before payroll taxes are deducted.

Now that we have a general idea of how each account works, here is a table that goes over a few of the more key differences and similarities to help aid in figuring out which is the best option fitting your situation.

In the event that you do have access to both options, there are also a few scenarios where you may want to take advantage of the HSA and a “limited purpose” FSA, which would allow someone already on the HSA to setup the FSA for use with dependent day care, expenses once your medical deductible has been met, or non medical expenses such as dental or vision care. To find a listing of those eligible expenses under an HSA or FSA and any additional clarification on how either works, consult IRS Publication 502.

One thing that many business owners or benefits administrators fail to remember is that while an FSA as part of Section 125 includes the appropriate plan documents to make those deductions pre-tax, many are unaware that those companies choosing to offer an HSA must also have a Section125 Premium Only Plan (POP) or have the updated language for the HSA in their existing Section 125 Cafeteria Plan.  This Premium Only Plan can be easily obtained through someone like your local CPA or very quick and easy through an online services such as www.taxfreepremiums.com.  In the event of an IRS audit, if this POP is not in place or out of date, the company could jeopardize all tax savings for both the employee and employer in addition to incurring potential penalties.

In summary, whether you are someone that only has some fairy minimal maintenance medications and an FSA is available to you, or you are looking to really take control of your healthcare and currently enrolled on a HDHP with access to an HSA, don’t miss out on the huge tax benefits available.

Time is money and administering your Section 125 Premium Only Plan (POP) shouldn’t be something that is costing you money, but saving it. So, to help save you in your valuable time here are some things to consider when deciding how to administer your premium only plan.

1. Where are your documents? Have ever seen the cafeteria plan documents that allow your company to legally deduct employee paid premiums on a pre-tax basis? Make sure your plan documents and summary plan description (SPD) are easy to access in the situation you are audited by the IRS.
2.  Have you distributed the SPD and enrollment paperwork to eligible employees?  A key component to administering a premium only plan is making sure your employees receive the appropriate legal documentation. If you haven’t been distributing this documentation the time to get started is now. Remember these documents can be distributed electronically if you would like to save on the printing cost.
3. When were your documents updated last? The laws and regulations covering Section 125 Cafeteria Plans change on a frequent basis. If your document is a few years old it is most likely out of compliance. To make sure you are not the one trying to stay current with all legal changes, hire a service like TaxFreePremiums who will update your documents for you as the laws change.
4. How are you doing required non-discrimination testing? Every year companies who have premium only plans are required to run discrimination testing.  Make sure you are keeping the results from the testing with your plan documents. If you are not doing the non-discrimination testing, follow-up with your document provider to insure this testing has been performed. You will want to review your current provider if they do not provide the non-discrimination testing.
5. How are you monitoring who is enrolled in the premium only plan? As you administer the POP plan, it is important to understand who is eligible to benefit from the tax savings. Remember that owners in an S-Corporation owning more than 2%, partners in a partnership, and members of an LLC are not eligible to participate in the premium only plan.

The time and money spent on providing progressive employee benefits continue to increase due to increase regulation. Administering your company’s Section 125 Premium Only Plan should not be adding to these cost, it should actually be saving you money. If you have questions regarding administration and other aspects of Section 125 Cafeteria Plans contact TaxFreePremiums at (877) 366-8702 or start a live chat now.

High Deductible Health Plans were the fastest growing segment of health plan design for 2011.  Most HDHP’s are accompanied with a Health Savings Account (HSA).  The benefits of a Health Savings Account or HSA are significant, and now your tax savings can be even greater.

2012 Contribution Limits

The IRS reviews the rate of inflation each year to determine the amount of tax advantaged contributions allowed into the employees HSA accounts.  For 2012 the IRS allowable tax-deductible contribution has been increased to $3,100 for a single and $6,250 for an employee with dependent coverage.    Everybody’s trying to do all they can to save money.  An HSA is a great benefit because it lets you put aside money to pay for any qualified health care expenses.   Contributions are tax-free, and you can spend the money when you need to without a “use it or lose it” deadline.  The assets can be used for yourself, your spouse, or your kids.  If you haven’t looked at an HDHP you should research and tell your employer how great this would be for you, and how offering a HSA will make the company a hero to its employees.

HSA Contributions must be run through a Section 125 Cafeteria Plan, and You’ll See Big Tax Savings

It’s a fact an IRS Section 125 Premium Only Plan – even without a HSA – is its tax-advantaged status.  When you pay for insurance benefits through a Section 125 POP plan, the premiums are deducted from the employee payroll on a pre-tax basis – this means contributions are calculated outside of your taxable income. The effect is a reduction in both your income tax and FICA taxes.  It’s the equivalent of an instant pay raise!

The employer receives a benefit too – the matching portion of FICA and Medicare are reduced, as well as Federal Unemployment Tax and depending on the specific state, unemployment taxes.

Make sure and alert your employees of the increased limits to take full advantage of the HUGE tax advantages the HSA.  Also check to confirm your current Section 125 document has language that allows for the  HSA contributions to be run through your plan.  If you’re a client of www.taxfreepremiums.com just simply log-in to your account and update the document, print, sign and file in the event of an audit.  It’s really that easy!!

City managers and human resource managers are finding themselves and their benefit packages under the public microscope over the past several years.  Where many towns, cities, and county budgets had allowed for 100% coverage of benefits that required no employee participation we’re finding that arrangement changing rapidly.  Many government or quasi government plans are starting to require their participants to cost share in at least a portion of their benefits.  Others are turning toward high deductible health plans coupled with a health savings account.  In either case, if you have not augmented your benefits plan with an IRS Section 125 Premium-Only Plan, you are missing out on substantial cost savings – and so are your employees.

The IRS can provide a solution

An IRS Section 125 POP Plan is often referred to as a cafeteria plan.  You likely have heard that a cafeteria plan allows employees the ability to select from a range of benefit choices, such as health, dental, vision, or disability insurance, and then pay for those benefits through payroll deductions.  But for workers who have never been required to contribute to the cost of the benefits you may not know the plan’s biggest benefit – its tax-advantaged status.

Once an employer has sponsored an IRS Section 125 Plan these payroll deductions can be elected on a pre-tax basis, which means that they reduce the employee’s taxable income.  This, in turn, reduces the employee’s payroll taxes.  Depending on the individual employees personal tax bracket some participants realize tax savings of up to 45% on premiums run through the Section 125 plan.  Municipalities save on average 8.45% in matching employer taxes and the savings could be much higher depending on their specific state and county tax savings and/or workers compensation premiums.  You can check out the tax savings for you and your employees at our site http://www.taxfreepremiums.com/WhyUse.aspx

Required Documents

Navigating the IRS documentation process isn’t exactly a walk in the park but the professionals at www.taxfreepremiums.com have created a turn-key solution.  If you have employees that pay a portion of their health premiums you need to check out the automated document process and see how easy it could be to get and stay in compliance.

Non-profits enjoy amazing tax treatment and are exempt from many of the laws, rules, and taxation that are required of private business.  However, over the past several years the IRS and D.O.L. have found many 501(c)3 have been extremely out of compliance with things such as retirement plan reporting and tax deductibility of employee withholdings just to name a few.  Based on these findings the IRS changed many rules governing qualified plans in 2009 for plan years starting 2010 in regards to having a written plan document, filing 5500’s with the IRS and many other steps to make sure these non-profits were in compliance.  Although these requirements are specific to 403(b) retirement plans our office has been amazed at the frequency of calls or live chat with executives at non-profits who believe they are exempt from the need to have a written plan document for their employee deductions for health and welfare benefits.

Non-Profits are required to have a Section 125 Plan if they deduct employee premiums pre-tax

Non-Profits enjoy tax exempt status for federal and state income tax on their earnings however employees are treated the same as any other U.S. employer.  To be clear, if you are a non-profit and require your employees to pay any portion of their medical, dental, vision, or other qualified expense and make these deductions pre-tax, you are required to have a Section 125 Plan.

The Section 125 Plan is required to be in writing and notice is required to be given to your employees in the form of an Summary Plan Description.  Although non-profits don’t have owners they may have highly compensated employees and are also required to perform non-discrimination testing.

What to do now

If you are a non-profit and find yourself making pre-tax deductions with no plan document……….NOW IS THE TIME FOR ACTION.  We can’t change the past but there is no time like the present!   You can sponsor an IRS Section 125 plan immediately and administration through a firm like www.taxfreepremiums.com is quick and easy.

The fact is that owners can not participate in the company’s Section 125 Cafeteria Plan. Specifically the following owner/employees are not able to participate in a Section 125 Cafeteria Plan:

• Owners of an S Corporation owning more than 2% and their spouse, parents, children, and grandchildren
• Partners in a partnership
• Members of a LLC

The people that fall into this category are not able to withdraw their premiums on a pre-tax basis. They are able to deduct the premiums they pay through their annual tax return to obtain some savings. All though these savings may not be as substantial, having a Section 125 Cafeteria Plan still has 2 significant benefits to the owners.

As owners of a business the bottom line is one of, if not the, highest priority. By setting up a compliant Section 125 Plan, the company will save a substantial amount on taxes. As employee premiums are deducted from their paychecks the employee’s taxable income decreases. This clearly saves the employee some money. However, many overlook the substantial amount saved by the company because it changes the amount of taxes the company pays as well. These savings help bolster the bottom line and possibly increase the amount owners are taking home.

The savings that go to the employee are also a key benefit to owners.  Current trends show that 1 in 3 employees hope to be working elsewhere in the next 12 months. By implementing a Section 125 Premium Only Plan, the owner shows loyalty to the employees in protecting them. This not only helps lower employee turnover, it also helps increase employee productivity.

While at this time it doesn’t appear this IRS regulation or rule will change anytime soon, what many don’t realize is that the owner can benefit as well in addition to offering a great option to their employees.  This happens because as part of the Cafeteria Plan, they in turn are able to avoid many of the matching taxes they are responsible for, now that the employee has reduced their taxable income.  So in the end, even if the owner can’t participate personally, they can still benefit tremendously.

The non-discrimination rule that applies to some benefit plans will increase its impact once final regulations are released.  The 105(h) rules prohibited employers with self-funded plans from creating a benefit package that shows preference to some individuals over others. The IRS will include fully funded plans in this requirement once the regulatory guidance is released.

Discrimination

The non-discrimination rule doesn’t apply to race. Instead, it is a way for the government to make sure that business owners and upper management don’t take advantage of tax benefits meant to help average individuals afford healthcare. The regulation applies to highly compensated individual, or HCi’s.

An HCI is a person who is a shareholder with more than 10% of employer stock, a high paid employee, or a high paid officer of the company. The business can’t offer to pay more of an HCI’s insurance benefit, offer better quality benefits, or offer a higher contribution. While some differences in benefit packages may occur based on specific employee contributions, those differences can’t discriminate or exclude lower paid employees.

Self funded

A self funded insurance plan is an employer sponsored healthcare plan where an employee pays most or all of the premiums. This can be accomplished with employee payroll deductions, flexible spending account, or both. A fully funded insurance plan is where an employer pays the insurance premiums as a part of its benefit package.

Self funded insurance plans had to adhere to the 105(h) non-discrimination rule since the ACA was enacted in 2010. That December, however, the IRS decided to exclude fully funded plans so that regulatory guidance could be created and released.

2012

It is not certain when fully funded plans will be expected to comply with non-discrimination rules. It is also not apparent whether the rules for fully funded plans will be the same as those for self-funded plans.

If your company offers fully funded insurance plans as a part of your benefit package, you will need to monitor changes to the non-discrimination plans as they occur. Once the IRS announces the regulation, your company should review your benefits to see if they are in compliance. You will also need to know whether your insurance plan is grandfathered, as that will affect its need for compliance.

For more information regarding compliance to non-decimation rules, explore our website. Our contact us to learn more.

This is the time of year to close out the books, get ready to file taxes and work with management to determine if there is a better and more effective way to keep more of the money you earn.  The GREAT news is there are a few opportunities still available for small business to have HUGE tax savings on expenses you already have.  Better yet, you can share these savings and increase morale with just a little bit of research.  IRS Section 125 Premium Only Plans have been around for years but like so many other government regulations many of us don’t know about them or just haven’t taken the time to implement one.

A Section 125 premium only plan, or POP, permits your employees to make contributions to their portion of premiums for group health, dental, and term life insurance before taxes are computed. Under Internal Revenue Code section 125, employees save their respective FICA and federal income tax on their portion of insurance deductions. In addition, most states the saving extends to state income tax making employee tax savings ranging from 15% to as high as 50%+ depending on personal tax rate and your state tax rate.  Regardless can you image describing to your employees a new plan that takes deductions they are already making and allowing them to increase their net take home?

The best part, the employer can save too, because the business is not required to pay FICA matches or FUTA tax on eligible expenses made by employee medical deductions. For most small- to medium-size companies, the savings help offset your benefit plan and can be substantial.

There are formal requirements from the IRS to sponsor a plan and provide notice to employee but the process can be automated through an annual subscription at www.taxfreepremiums.com IRS plan requirements are stringent and, of course, very complicated which is why most corporations choose to hire a document preparation and management service. We make the entire process turn-key and provide a detailed checklist of all necessary steps to guide you through compliance.

There is no better time than now and the plan inception date can be anytime.  The excuses that its too complicated has been eliminated.  Make your employees a raving fan and take control of your tax savings this year.   We’ve all dreamed of having a portion of our income that’s off limits to the IRS and here it is.

With the passage of Obama’s Patient Protection and Affordability Care Act (PPACA) government compliance with programs such as IRS Section 125 Plans will be a work in progress for years to come.  The most pressing change is based on the 2013 limitation to the out of pocket component of the Section 125 Plan.  Where the core document provided by www.taxfreepremiums.com is the Section 125 Premium Only Plan or POP document there is no update required.

Although there are no required updates from the DOL we always suggest that plan sponsors check their documents for accuracy to confirm their address, contact info and other pertinent information is accurate on both their plan document and Summary Plan Description.

If I have a Section 125 Plan do I need to do anything now?

All plan sponsors are required to provide annual non-discrimination testing.  We provide this testing software spreadsheet at no additional cost but action is required.  You must enter each of your eligible employees into the testing software and run the test.  Our software will run the IRS test and provide results that will provide written and documented results for you to file in the event of an audit.

What if we are a new sponsor of a Section 125 POP PLAN?

If this is the first year your company has sponsored a Premium Only Plan we suggest you do a pre-test.  Your annual subscription will provide both the 2011 and 2012 testing documents.  The definition and salary range will change from year to year and testing has potential to change even from one year to the next.  If you had a non-owner HCE (Highly Compensated Employee) or Key employee in 2011 make sure you pre-test your 2012 plan year to see if they might be able to participate this year.   If this is your first year make sure you are in compliance before you set up payroll deductions for your HCE employees.

If you have any questions please feel free to contact our team of professionals.  Next week we’ll get details about the 2012 non-discrimination testing and what changes the IRS confirmed about salary definitions for HCE’s.

Last week, we talked about how some businesses are considering discontinuing their healthcare plans because of the Affordable Healthcare Act (AHCA). Would this decision benefit businesses or their employees?

The companies that are saying that they are considering dropping their Employer Sponsored Healthcare Plans say that they would save money in administration costs, even if they have to pay fines. However, the AHCA will not create additional paperwork for businesses that already have insurance programs in place. In fact, for most employers and their workers, they will see little change in 2014, when the AHCA is to take effect.

Because of the grandfather clause in the AHCA, Employer Sponsored Healthcare Plans that have been in effect since at least March 23, 2010, will see little difference. If the individual works at a large firm, the effect will be even less significant than it will be for employees of small businesses.

Employees of large companies who have families will be able to insure their college age children until they are 26 years old. There will also be a cap on the amount of money they can put in their flexible spending accounts every year, but these two major changes will be to most they will see on average.

For employees of small businesses, the changes that will take effect in 2014 will be significant. Small businesses have a difficult time finding affordable insurance, and those who offer Employer Sponsored Healthcare Plans have to pass a great deal of the expense on to the employees. These companies will benefit from the AHCA.

Small companies will have a larger selection of affordable healthcare options that will benefit their employees. These healthcare options will also offer better benefits than are currently available. Employees will be able to access prevention services and access to pediatrician services and prenatal care without cost sharing.

With all of these benefits, why would a company consider dropping their coverage? Some companies believe that with the options that will be available to individuals, offering health insurance will no longer be an incentive when attracting employees. Now, many people look at benefits that are offered in addition to salary when weighing employment options. Without that benefit, how would a company encourage qualified candidates to join their company?
Another reason may be fear. Change often breeds fear as the future becomes uncertain. Once the true impact of the AHCA is seen, many businesses will adjust and see that the changes aren’t as extreme as they once thought they were. If a company is uncertain about their current healthcare plan and if they should consider dropping coverage should consult a human resource professional with experience in healthcare benefits.