Balancing an employer’s desire to provide benefits with an employee’s need to secure them can be a challenge. Factor in cost, tax obligations, and other variables, and the task becomes more daunting.
Enter Section 125 plans, more commonly known as cafeteria plans. While different types of these plans exist, each provides the opportunity to save money by reducing both the employer’s and employees’ tax liability.
A Section 125 plan may be established pursuant to rules found in the Internal Revenue Code (IRC) Section 125, which provides an exception to what is generally called the “constructive receipt doctrine.” Under the constructive receipt doctrine, offering an employee a choice between cash and an employee benefit requires that the amount that could have been received be included in the employee’s gross income.
A Section 125 plan allows employers to provide their employees with a choice between cash and certain qualified benefits without adverse tax consequences. Without a Section 125 plan, employee contributions can only be made with after-tax dollars. The three basic forms of Section 125 plans are:
- Premium Only Plan – The most basic and most popular. This plan allows employees to pay their portion of insurance premiums with pre-tax dollars, which in turn reduces both the employer’s and employees’ tax liability. Benefits that are typically offered within a Premium Only Plan include: health, dental, vision, accidental death and dismemberment and group term life insurance.
- Flexible Spending Account – Employees may make pre-tax contributions to these accounts, from which an employee may seek reimbursement for expenses paid for child care, health plan deductibles and eligible medical expenses not otherwise covered under a health plan. A Flexible Spending Account allows an employee to increase his or her spendable income while also reducing the employer’s tax liability.
- Full Cafeteria Plan – This permits the employer to make a non-elective contribution for every eligible employee. The employees may spend the employer contribution to purchase any of the benefits offered within the plan. In addition, the employee may contribute pre-tax dollars to purchase additional benefits beyond what he or she can purchase with the employer’s contribution.
Of course, many additional variables impact Section 125 plans, such as: offering employees a choice between cash and benefits; limitations on changing employee benefit selections during the plan year; access to any unused Flexible Spending Account funds; impact on other benefits such as Social Security or retirement benefits; administrative costs; and special considerations related to the Affordable Care Act.
It can be a difficult balance to strike, but the Benefits team at The Reschini Group can help determine the best course of action for your specific circumstances. Contact us today to learn more and to set up a meeting.
Copyright 2020 The Reschini Group
The Reschini Group provides these updates for information only, and does not provide legal advice. To make decisions regarding insurance matters, please consult directly with a licensed insurance professional or firm.