Section 125 Planning

Section 125 Planning describes the provisions available under IRS Code Section 125 that allows any employer (except self-employed sole proprietors) to set up a Flexible Spending Account (FSA) or Premium Only Plan (POP). Under an FSA, employees can:

choose to set aside money on a use-it-or-lose-it basis to pay for out-of-pocket allowable medical expenses including copays, deductibles, chiropractic costs, vision care, eyeglasses, dentures, etc.,

pay the employee portion of health, dental, and vision premiums on a pre-tax basis,

set aside money to pay for dependent costs, such as day-care expenses for minor children. Both parents must be working full time in order to be eligible for dependent care deductions.

Employee elections under an FSA are made yearly, or upon a qualifying event, such as a marriage, change in status, etc. Flex plans with all three modules are more difficult and expensive to establish and maintain. As a rule, the FICA and FUTA tax savings to the employer is mitigated by start-up and compliance costs for employers under 6 employees.

Depending on the level of employer contribution for insurance, employees may need the tax savings to make their portion of the premiums affordable.

DID YOU KNOW: The most common form of Section 125 is a Premium-Only Plan. Relatively simple and inexpensive to setup, they allow pre-tax treatment of employee-paid insurance premiums for health, dental, and other medical coverage's, only.

Without a Section 125 plan, an employer may not pre-tax withhold ANY premium contribution legally. Section 125 audits are becoming an increasingly popular way for the IRS to raise revenue. Yearly compliance testing under a Section 125 FSA is recommended.

We advise employers on the feasibility for Section 125 planning, and then set-up the type of plan that is appropriate for you, using an established, professional third party administrator, starting at around $100.00 (set-up only). For additional information, or a quote, email or give us a call at 303-422-1660.