Everything you need to know about Section 125 plans from Nazpay
If your employees pay a portion of their group insurance premiums, there’s a way to increase their take-home pay and reduce your payroll taxes at the same time. To achieve this, Nazpay can help your company establish either a premium only plan or flexible spending account. Plus, we handle all of the administrative details. Section 125 Plans, also known as Premium Only Plans (POP) are a form of Cafeteria Plan that is authorized under Section 125 of the Internal Revenue Code. A Section 125 plan converts the employees’ portion of health insurance premiums from after-tax payments to Pre tax payments
Premium Only Plans
A premium only plan offers a benefit to both you and your employees. It provides the opportunity to obtain favorable tax treatment on employer-sponsored benefits, thanks to section 125 of the Internal Revenue Code. Here’s how it works:
- Employees’ premium contributions are automatically deducted from their salaries before taxes are taken out.
- Taxable income is reduced by the amount contributed, so employees pay less in taxes, and have more take-home pay.
- With employee pretax income lowered, employers pay less in social security (FICA) payroll taxes. (For applicable state legislation, consult your tax advisor).
- Tax savings will more than cover costs of setting up a plan
- Can be used as a competitive advantage to hire and retain good employees.
- People will net payroll check increases, meaning more money in their take home pay.
What are the benefits of a Section 125 plan?
Employer & Employee Benefits, Savings for employer
Based on a company with 35 employees whose monthly medical premiums are as follows:
|20 employees have individual premiums of$ 50 a month||20 x $50 = $1000 x 12 months =$12,000|
|15 Employees have family premiums of $100 a month||15 x $100 = $1500 x 12 months =$18,000|
|Annual Medical Employee Premium =||$30,000|
|Employer FICA tax rate x||7.65%|
|Employer’s Annual savings =||$2,295|
Your solution to Payroll
What do I need for a Section 125 Plan?
It’s not hard to implement these benefits for your company. You would need the following:
- A Written Premium Conversion or POP Plan document on file.
- Hand out Summary Plan Description to all employees.
Will do preliminary non-discrimination compliance testing upfront, mid-year and end of year.
If you have less than 100 employees, you don’t need an IRS 5500 Annual Tax return.
What does Nazpay need to start my Section 125 Plan?
- You will then sign the administration service agreement.
- Development of required legal documents, including the adoption agreement, plan document, and summary plan description.
- You will get an application from us to fill out; we will help you if you need it.
- You will also get the Employee Election Forms; these are done annually for discrimination testing.
- Payroll integration.
Payroll tax without Premium Only Plan
Based on an employee with a gross monthly income of $ 12000 and a $100 monthly medical deduction without a Pre-tax medical deduction
|Federal Withholding (average 15%)||– 180.00|
|Medical Insurance deduction||-100.00|
|Net Pay =||$828.20|
Payroll tax savings with Premium Only plan
|Medical insurance deduction||-100.00|
|Federal Withholding (average 15%)||– 165.00|
|Net Pay =||$850.85|
|Additional employee take home pay is $22.65 monthly or $271.80 annually!|
Flexible Spending Accounts
A flexible spending account (FSA) offers a budgeting tool that helps pay for out-of-pocket medical, dental, and dependent care expenses not covered by employer benefit plans. Also, like a premium only plan, an FSA helps pay for itself by increasing employee take-home pay while decreasing employer payroll taxes.
Employees decide how much of their salary should be set aside, before taxes, to pay for unreimbursed expenses, like co-payments, deductibles, and even some over-the-counter medication. The amount is automatically deducted from their paycheck every pay period and is credited to their FSA account. Each time they incur an expense, they simply submit a claim by mail, and a reimbursement is made from their account. Nazpay provides claim reimbursements on a weekly basis. For maximum convenience, our optional check signing feature will sign and mail the checks to the employees’ homes, or reimbursement funds can be electronically deposited directly into the employees’ bank accounts.