How Employees Benefit. 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. Employers benefit by reducing the 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..
Who Can Participate. Employees of regular corporations, S corporations, limited liability companies (LLC's), partnerships, sole proprietors, professional corporations, and not-for-profits can all reduce payroll taxes by establishing a Section 125 Premium Only Plan. While the Code prohibits a sole proprietor, partner, members of an LLC (in most cases), or individuals owning more than 2% of an S corporation from participating in the Section 125 POP, owners may still benefit from the savings on payroll taxes by sponsoring the plan for their employees.
When Is The Best Time To Start. Contrary to popular belief a Section 125 Premium Only Plan can be started any time during the year. The best time to establish a Section 125 plan is when your group health insurance plan renews. Because most groups receive rate increases at renewal this is the ideal time to allow employees to sign a new Section 125 Election form prior to the new Plan Year. It is also quite acceptable to start a new short Plan Year anytime. Say it's May, and you prefer a calendar Plan Year from January 1 to December 31. You can start a Short Plan Year, say on June1 and end the first Short Plan Year on December 31. After December 31 your Section 125 Plan will be on a calendar year from January through December.
What About Existing Section 125 Plans. If you already have a Plan you started years ago, you can amend and restate the Plan anytime. We simply need the original start date of your old plan so we can maintain the continuity back to the original start date. It's not unusual for a group to misplace a Plan Document and need to replace it. This is a good time to update the old plan with current plan documents. If your document was written before 2002, it certainly needs to updated as soon as possible. So many changes have taken place in IRS Code and new laws that today's Plan Document is almost 15 pages larger than documents prior to 2002. This means you may be making administrative decisions based on outdated information.
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