Why Should You Consider 125 Plans for Employee Benefits?

Offering competitive benefits attracts, satisfies, and retains top talent. Benefits include everything from retirement plans to health insurance coverage. When you dive into different small business employee benefits, you might consider a section 125 plan employee benefits. 

 

As a business owner or HR professional, you’re always looking for ways to provide competitive benefits while managing costs. In this blog, we’ll explore what Section 125 benefits are, their advantages, and why they are a must-have for businesses aiming to attract and retain top talent. 

What Exactly is a Section 125 Plan?

A Section 125 plan is a provision of the Internal Revenue Service (IRS) law that permits employees to convert taxable benefits, like a cash salary, into nontaxable benefits. Before taxes are paid, these perks may be taken out of the paycheck of an employee. Participants who often incur costs for child care and medical concerns benefit most from these programs. 

 

Section 125 is also known as a cafeteria plan. Employees who participate in a Section 125 plan have the option to prepay insurance premiums and any further expenses that can later be used for certain child care and qualified medical costs. 

How Do Section 125 Benefits Work?

Employers set up 125 Plans for Employee Benefits to let employees choose from a range of pre-tax benefits, such as:

Employees decide how much of their salary they want to contribute to these benefits, and the employer deducts the amount before calculating payroll taxes.

Who Can Participate in a Section 125 Plan?

Now that you know what a cafeteria plan is, let’s look at who can participate in or purchase a Section 125 plan. Any employer with employees can sponsor a cafeteria plan, including:

 

 

 

 

 

 

 

But not everyone who performs work for the business can participate in the plan. Nonemployees cannot enroll in a section 125 plan, including:

 

 

 

 

Why Should You Consider 125 Plans for Employee Benefits?

There are many benefits when employees consider 125 plans for employee benefits. The main advantage for employees is also very much tax-related. Anyone participating in the plan can typically anticipate saving 20% – 40% of each and every dollar invested in the plan.

 

Each year, the employee must pick how much money to contribute to the plan. Every payment cycle, an automatic deduction for the “election” amount is made from the paycheck of the employee.

If an employee chooses to have $1200 per year withheld from their paycheck and invested in the plan, for instance, and the business has 24 separate pay periods, $50 is automatically and tax-free withheld from each pay period.

 

The third-party administrator of the plan receives and holds the funds. On request, it is then given out for repayment of acceptable expenses.

 

Some Benefits to the Employer 

 

Section 125 plans have a variety of tax-saving advantages for employers. Employers save money on workers’ compensation insurance premiums, the Federal Insurance Contributions Act (FICA) tax, the Federal Unemployment Tax Act (FUTA) tax, and the State Unemployment Tax Act (SUTA) tax for each member in the plan.

 

The Section 125 plan typically pays for itself. This is since the expense of actually opening the plan is cheap when paired with the additional tax savings.

 

The fact that employees get a rise without the firm having to pay more is an extra bonus. The company is frequently urged to make a contribution to each individual employee’s plan in order to encourage higher participation by individuals who are not yet enrolled in the Section 125 plan, as more members in the plan amount to further tax savings for the employer.

What are the Expenses Covered in Section 125 Benefits?

Under a Section 125 plan, a wide range of child care and medical expenses are available for reimbursement. Numerous qualified expenses for medical supplies and procedures are eligible for reimbursement. Expenses that qualify for this include: 

 

 

 

 

 

 

 

 

 

 

 

Benefits Excluded from Section 125

 

 

 

 

 

 

 

 

How Can One Set Up a Section 125 Plan?

A Section 125 plan can be created in a fairly simple manner. An employer is required to carry out nondiscrimination testing, notify workers, and provide the appropriate documents. 

The three nondiscrimination standards that must be passed by Section 125 plans are:

These tests are used to assess whether the plan favors employees who earn a high wage or important employees of the company. Different benefits are offered by cafeteria programmes. Employees may pay their fair share of insurance premiums. This is normally done on a pretax basis under a premium-only plan (POP).

 

Employers are required to work with a competent Section 125 third-party administrator that can offer the most recent documents for establishing a plan and keep the employer informed of the most recent compliance requirements.

Can You Change a Cafeteria Plan?

Except in the case of a qualifying life event, employees who have already enrolled in a cafeteria plan and made their selections often cannot change them. This is normal until the following open enrollment period. It can be counted in the following events: 

 

 

 

 

 

These circumstances do not suffice in and of themselves to support a special open enrollment. Employees typically need to show proof of their eligibility in the form of a marriage licence, birth certificate, letter from an insurance company, or other legal document.

Take Advantage of Section 125 Benefits with Life Strong Care

If you want to improve your benefits package and create financial advantages for both your business and employees, it’s time to implement 125 Plans for Employee Benefits. These plans offer significant savings, attract top talent, and enhance overall job satisfaction. At Life Strong Care, we specialize in helping businesses implement Section 125 Plans that maximize savings and enhance employee satisfaction.

 

Don’t miss out on the opportunity to improve your benefits package while saving on taxes. Contact Life Strong Care today to learn how we can tailor a 125 Plan to fit your business needs!