Why does your company need a premium only Section 125 Plan?

 The premium only section 125 Plan is a cafeteria plan which comes under the Internal Revenue Code (IRS) enables employees to take taxable benefits such as their salary and turn them into non-taxable gains. Such plans solely permit employees to keep a portion of their payrolls or wages on a pre-tax basis to meet medical costs, insurance premiums, and other expenses.

The cafeteria plan is free from federal taxes (FICA and FUTA), state income tax, social security tax, and medicare tax- meaning a decrease in the employees' total taxable salary and an increase in their net pay. Also, the reduction in the gross earnings of the employees subsequently allows the employer to enjoy certain tax benefits as well. 

Note: 

1. A plan cannot be counted as a cafeteria plan if it only provides taxable benefits to the employees.
2. Typically, a cafeteria plan has more non-taxable benefits when compared to taxable benefits (non-taxable benefits are the main selling points).

Benefits Offered By A Cafeteria Plan

Non-taxable benefits

• Health Insurance
• Vacation Days
• Dental Care
• Vision Coverage
• Life Insurance Plans
• Accidental Death and Dismemberment Plans
• Disability Insurance
• Flexible Spending Accounts (FSA)
• Dependent Care Flexible Assistance Plans
• 401(k) Retirement Plans

Taxable Benefits

• Cash
• Stocks

Note: Cafeteria Plans do not include benefits such as educational assistance and de minimis fringe.

Who can open a Section 125 plan?

All types of employers can open the premium only section 125 plan.This includes C corporations, S corporations, LLCs (Limited Liability Companies), partnerships, governmental entities, and sole proprietorships. Typically, employees who are subject to U.S. income taxes and have had spent at least 1,000 hours working for your company in the previous calendar year qualify for this plan. 

Note: Exceptions to participate in a Section 125 plan apply to those employees:

• Under 21 years of age
• Who has worked for your company for less than 365 days
• Partners in a partnership
• Members in an LLC

How to start a Section 125 plan

Setting up a Section 125 plan is pretty straightforward and requires only three simple steps:

1. The employer needs to complete the required plan with proper documentation.
2. Notify employees.
3. To meet your documentation needs, hire a third party such as a broker or a benefits attorney to administer your Section 125 plan, process employee reimbursements, and keep your company abreast of proposed regulations.

You must conduct nondiscrimination testing; once you start offering Section 125 plans to your employees. The nondiscrimination tests are designed to determine if the plan favors highly compensated or key employees of the company. Here are the three criteria that you must follow to conduct nondiscriminating testing:

• Eligibility to participate: You must revise your plan if the third party appointed by your company finds that your Section 125 plan is inclined more towards your company's highest-paid employees to participate.

• Benefits and contributions: The benefits and contributions offered by you in your Section 125 plan must equally favor all types of employees- be it the highest-paid employee or the lowest paid.

• Concentration: The value of nontaxable benefits provided to your key employees (who can be identified by your third party) must be at most 25% of the value of all employees' nontaxable benefits.

Conclusion

For many employers, the premium only section 125 plan are a great way to retain their valuable employees; while offering them multiple benefits. Sometimes, the cafeteria plans can be discriminatory. Therefore, employers need to establish simple cafeteria plans that will eliminate the nondiscrimination testing criteria. 

Ensure to consult qualified employee benefits professionals from Davidow Financial & Insurance Services, Inc., if you want to offer your business employees a beneficial section 125 cafeteria plan. Contact the experts today for detailed steps to set up and administer the Section 125 Premium Only Plan.