What Is A Section 125 Premium Only Plan?
The Revenue Act of 1978 created IRS sanctioned Premium Only Plans. The Section 125 Premium Only Plan (POP) saves the employer and the employee money by reducing payroll taxes.
A Premium Only Plan allows employees to make their contributions towards their benefits on a pre-tax basis. Examples of some eligible programs are:
Health Insurance
Dental Insurance
Disability Income Protection
Vision Care Insurance
Employees don’t pay FICA, Federal, or where applicable, state or local taxes on money used to pay for their portion of employer-sponsored insurance premiums.
The Premium Only Plan reduces the employers’ taxable payroll by the total amount of employee contributions for benefits. Lower taxable payroll means lower payroll taxes!
Free Section 125 POP Plans
Broad Reach Benefits utilizes the services of a national CPA firm regarded as an expert in employee benefits to provide our clients with a free Section 125 Premium Only Plan. We cover the complete first-year cost (setup and annual fee) for our clients.
The plans include:
- Adoption Agreement
- Plan Documents
- Summary Plan Description
- Complete instructions
- Employee Communications
- Assistance with Discrimination Testing
Flexible Spending Accounts
Flexible spending accounts, or FSAs, provide employees with an important tax advantage that can help them pay health care and dependent care expenses on a pretax basis. By anticipating their family’s health care and dependent care costs for the next plan year, they can lower their taxable income.
Essentially, the Internal Revenue Service (IRS) set up FSAs as a means to provide a tax break to employees and their employers. Employees agree to set aside a portion of their pretax salary in an account, and that money is deducted from their paycheck over the course of the year. The amount they contribute to the FSA is not subject to social security (FICA), federal, state or local income taxes—effectively adjusting their annual taxable salary. The taxes they pay each paycheck and collectively each plan year can be reduced significantly, depending their your tax bracket. As a result of the personal tax savings they incur, their spendable income will increase.
The example that follows illustrates how an FSA can save money.
Bob and Jane’s combined gross income is $30,000. They have two children and file their income taxes jointly. Since Bob and Jane expect to spend $2,000 in adult orthodontia and $3,000 for daycare in the next plan year, they decide to direct a total of $5,000 into their FSAs. (See table)
| Without FSA | With FSA | |
|---|---|---|
| Gross Income | $30,000 | $30,000 |
| FSA Contributions | $0 | -$5,000 |
| Gross Income | $30,000 | $25,000 |
| Estimated Taxes | ||
| Federal | -$2,550* | -$1,776* |
| State | -$900** | -$750** |
| FICA | -$2,295 | -$1,913 |
| After-Tax Earnings | $24,255 | $20,561 |
| Eligible Out-of-Pocket Health & Dependent Care Expenses | -$5,000 | $0 |
| Remaining Spendable Income | $19,255 | $20,561 |
| Spendable Income Increase | — | $1,306 |
* Assumes standard deductions and four exemptions
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The Health Care Reimbursement FSA
The health care reimbursement FSA lets employees pay for certain IRS-approved medical care expenses not covered by their insurance plan with pretax dollars. For example, cash that they now spend on deductibles, co-payments or other out-of-pocket medical expenses can instead be placed in the health care reimbursement FSA pretax.
Health FSAs employ a “use-it-or-lose-it” model. If employees do not use the funds that they contribute to their FSA within the end of the year, they will have to forfeit those funds. However, employers also have the option of allowing employees to carry over up to $500 of unused funds from one year to the next. In addition, any amount that is carried over does not count toward the maximum contribution limit.
Eligible Expenses
Eligible health care expenses for the health care reimbursement FSA include more than just deductible and co-payments. Employees can also reimburse items such as prescription drugs, dental expenses, eyeglasses and contacts, certain medical equipment and many more items. For more information about eligible medical expenses, please refer to IRS Publication 502, Medical and Dental Expenses, available at www.irs.gov/publications/p502/index.html.
Over-the-counter drugs used to be eligible expenses, but a law effective Jan. 1, 2011, only allows claims for over-the-counter medication or drug expenses (other than insulin) to be reimbursed if the patient has a prescription. This rule does not apply to items for medical care that are not considered medication or drugs. Equipment such as crutches, supplies such as bandages and diagnostic devices such as blood sugar test kits still qualify for reimbursement without a prescription.
The Dependent Care FSA
The Dependent Care FSA lets you use pretax dollars toward qualified dependent care. The annual maximum amount you may contribute is $5,000 (or $2,500 if married and filing separately) per calendar year.
If you elect to contribute to the dependent care FSA, you may be reimbursed for:
- The cost of child or adult dependent care
- The cost for an individual to provide care either in or out of your house
- Nursery schools and preschools (excluding kindergarten)
Eligible Expenses
In order for dependent care services to be eligible, they must be for the care of a tax-dependent child under age 13 who lives with you, or a tax-dependent parent, spouse or child who lives with you and is incapable of caring for himself or herself. The care must be needed so that you and your spouse (if applicable) can go to work. Care must be given during normal working hours (instances such as Saturday night babysitting does not qualify) and cannot be provided by another of your dependents.
Is the FSA program right for each employee?
Flexible spending accounts are beneficial for anyone who has out-of-pocket medical, dental, vision, hearing or dependent care expenses beyond what his or her insurance plan covers.
It’s easy to determine if an FSA will save an employee money. They will need to estimate the expenses that they know will occur during the year. These include out-of-pocket expenses for themselves and anyone claimed as a dependent on their taxes. If the employee or a family member takes maintenance medications every month or lays out monthly payments for orthodontics or any other predictable expense, they should be using pre-tax dollars through their FSA to help them stretch their dollars.
How do the accounts work?
If employees decide to enroll in one or both of the accounts, their contributions are taken out of each paycheck—before taxes—in equal installments throughout the plan year. These dollars are then placed into their FSA. When they have an eligible health care or dependent care expense, they must submit a claim form along with an itemized receipt to be reimbursed from their account.
The health care reimbursement FSA will reimburse employees for the full amount of their annual election (less any reimbursement already received), at any time during the plan year, regardless of the amount actually in their account. The dependent care FSA will only reimburse them for the amount that is in their account at the time they make a claim.