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Main Differences of Tax Exclusion and Section 125

When you consider offering health insurance to your employees you usually will come across terms or phrases that you think you understand but aren’t quite sure. As a business owner you want to know exactly what benefit you are receiving and how it is happening. Section 125 Plans, tax exclusions, and Employer Sponsored Health Insurance could be some of the jargon that make you feel a little uneasy. What are the key differences between Section 125 Cafeteria Plans and tax exclusion?

Employer Sponsored Health Insurance is the way most working American families gain access to their health care. Usually, an employer will cover as much as 85% of an employee’s health care insurance costs and up to 75% of the employee’s family health care costs. This is a hefty expense for most businesses, but the federal government has created a benefit in the form of a “tax exclusion” as an incentive for businesses to continue, or to begin, this service for their employees.  The tax exclusion is also called a tax expenditure.

The tax expenditure imagined as a practice to save businesses money, however, much of the time it is not a sufficient strategy for most small businesses to justify the expense. On a regular basis small businesses can’t afford to offer health care benefits. This can be seen as a major reason why employees, potential or existing, may choose a different employer or choose not take a position with a small business. A Section 125 Cafeteria plan is just an additional way for employers to save pretax dollars by using them to pay for employee health care.

Tax exclusion is the part of the premiums that the employer pays for healthcare premiums as part of their Employer Sponsored Health Insurance, while a Section 125 plan covers what the employee pays for group health insurance. The employees, depending on the type of plan the business has, or chooses to, put in place, may be able to use payroll deductions to cover insurance premiums. In the situation where a Section 125 Cafeteria plan is implemented, the amount paid in premiums by the employee can be treated as exempt from payroll and income taxes, because these payroll deductions are treated as pretax dollars.

In any case, whether or not you chose to offer an Employer Sponsored Health Insurance, a Section 125 plan or some other set of incentives to your employees is up to you. It is probably beneficial to go over your options with an expert, like an attorney, insurance broker, or payroll company. It is always important to consider the cost, and determine the benefit to your employees when weighing your choices, in order to gain the highest utility for your benefit package.