Section 125 Plans (a.k.a. Cafeteria Plans) Help |
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When an employee pays a portion of the premium for his or her health, dental, or vision insurance, we can help you set up a Section 125 plan (also known as Cafeteria Plans). This type of plan enables employees to pay their premium before taxes are deducted from their paycheck; employees save money, because they only pay taxes on the salary they receive after making premium payments. A Section 125 plan also saves the employer money, because the employer’s FICA and worker’s compensation payments are based on the salary after the employee-paid portion of the health, dental, and life insurance premium has been deducted.
Setting Up a Section 125 Plan
It’s important to know that your company can’t just start deducting employees’ premium payments on a pre-tax basis without setting up a specific plan legally. The IRS authorizes Cafeteria Plans under Section 125 of the Internal Revenue Code. To set up an acceptable plan, you need the following:
• Plan document
• Summary plan description
• Corporate resolution
• Introductory letter
• Enrollment forms
• Discrimination testing
• Dept. of Labor filings
• Payroll Dept. consulting
• Completed and filed IRS Form 5500
• Communication with employees
Professional Benefits & Insurance Services can quickly and easily get proposals from companies to help you set up a Section 125 plan for your company.
How A Section 125 Premium-Only Plan Saves Money
| Without Sec. 125 | With Sec. 125 | |
| Employee’s Monthly Salary | $ 2,000 | $ 2,000 |
| Medical, Dental, Vision Premium | $ 0 | $ 100 |
| Taxable Salary: | $ 2,000 | $ 1,900 |
Employee Payroll Deductions: |
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| Federal Income Tax @ 15% | $ 300 | $ 285 |
| Soc. Sec. Tax @ 7.65% | $ 153 | $ 145 |
| State Income Tax @ 4% | $ 80 | $ 76 |
| Employee-Paid Premium | $ 100 | $ 0 |
| Total Spendable Income: | $ 1,367 | $ 1,394 |
| Increase in Spendable Income Per Month: $ 27/mo. | ||
| Increase in Spendable Income Per Year: $324/yr. | ||
Employer Savings, Assuming Ten Employees and Payments of $100/mo. Per Employee
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| Annual Salary Reduction: $100/mo. x 12 mos. x 10 employees | $ 12,000 | |
| Employer Paid Taxes: | ||
| FICA @ 7.65% x $12,000 | $ 918/yr. | |
| Worker’s Comp. Savings @ 2% x $12,000 | $240/yr. | |
| Total Employer Savings | $1,158/yr. | |
| Approximate One-Time Cost to Set Up Plan: | ($ 395) | |
| Net First-Year Savings | $ 763 | |
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