Section 125 Plan – are named after Title 26, Section 125 of the United States Code where “cafeteria plans” are specifically excluded from the
calculation of gross income for federal income tax purposes.
125 plans allow employees to contribute pretax dollars into the plan, or pay for additional Voluntary/Ancillary Insurance Products above & beyond their Group Major Medical Policy on a Pre-Tax Basis through payroll deduction. Contributions toward plans are not subject to federal, state, or social security taxes. Since no federal, state or social security taxes are taken out and the dollars are not included as gross income, the employee saves anywhere from 27 – 50% on these purchases. The employees determine what aspects of benefits are important to them.
There are still greater benefits to the employer:
- FICA Contribution Savings – Since the employees’ contributions are not subject to social security tax (FICA), the employer does not have to pay its matching contribution either. Thus, your business can save 7.65 cents for every dollar contributed.
- Workers’ Compensation Premium Savings – Since, depending on your state, workers’ compensation premiums are set by size of payroll, the employer’s payroll is reduced by every contribution resulting in lower workers’ compensation premiums.
However, using a Section 125 designation MAY change the Tax-Favorable nature of paid benefits on certain Insurance Polices. Be sure to ask one of our Advisors about how using a Section 125 plan may affect your policy.