Why Should I Have a Section 125 Plan?
As a business owner, a good way to provide health care benefits to your employees is with the establishment of a Section 125 Plan. The plan is named after title 26, Section 125 of the Internal Revenue Code where cafeteria plans are specifically excluded from the calculation of gross income for federal income purposes.
Not only does a Section 125 Plan allow an employer to provide health care benefits, but a full cafeteria plan can also be used to provide dependent care benefits and spending accounts for employees to decide what they want in their benefits plan.
One of the biggest reasons to have a Section 125 Plan is the tax savings it provides. For example, if your cafeteria plan provides health insurance, the employee’s premium is deducted from his or her taxable income. This deduction, in turn, reduces the amounts of Federal withholding, FICA tax, and Medicare tax that the employee has to pay. Great for the employee, but also great for you; the lower taxable income translates into lower employer matching shares of FICA and Medicare taxes, and lower FUTA. Depending on the state where you’re located, this might also translate into lower State taxes, too.
Another great reason to have the Section 125 Plan is that it’s essentially a pay raise for employees that didn’t cost you a thing. The employee pays their respective portion of the premiums for the insurance, but because they do it with pre-tax dollars, it represents a discount of the regular price. The cafeteria plan allows the employer to offer to employees, on a pre-tax basis, benefits that the employer could not otherwise afford; this makes those coverages less expensive for your workers.
The range of benefits that you can offer through a cafeteria plan is extensive. For example, with a cafeteria plan, you can offer employees the ability to pay their premiums pre-tax through the plan for coverage of health, dental, life and other ancillary coverages. Employees can see that the employer is interested in, and is helping provide for, their welfare by taking the time and care to establish and administer the plan.
Even greater benefits to the business owner include FICA Contribution Savings and Workers Compensation premium savings. Since the employees’ contributions are not subject to social security tax (FICA), the employer does not have to pay its matching contribution either. Your business can save 7.65 cents for every dollar contributed. Depending on your state, workers’ compensation premiums are set by payroll size, and payroll is reduced by every contribution resulting in lower workers’ compensation premiums.