If employees contribute toward the cost of the company's group health, term life, accident or disability insurance, or if they contribute pre-tax payroll decutions to a Health Savings Account (HSA), a written Section 125 plan must be in place. These plans are sometimes called Cafeteria Plans.
Enabling employees to pay their share of group insurances with pre-tax dollars lowers the employee's income tax withholding and effectively results in lower cost of insurance. Depending on the income level, employee's average savings range from $.25 to $.49 for every dollar they pay via the Section 125 plan.
A Section 125 Plan can be a Premium Only Plan (POP) or a Flexible Spending Account (FSA).
Premium Only Plan (POP) - Employers may deduct the employee's portion of the company-sponsored insurance premium directly from said employee's paycheck before taxes are deducted.
Flexible Spending Account (FSA) - In an FSA, employees may set aside on a pre-tax basis a pre-established amount of money per plan year. The employee can use the funds in the FSA to pay for eligible medical, dependent care, or transportation expenses.
Rothrock Payroll Services can help create a custom written Section 125 Plan Document and Summary Plan Description and advise on eligibility and/or discrimination issues. Click on the links below to complete an application for a Section 125 or FSA plan. Once we receive the application, we will contact you.
Benefits to the Employer
Employers may add an FSA Plan as a key element in their overall benefit package. Because an FSA Plan offers a tax-advantage, employers experience tax savings from reduced FICA, FUTA, SUTA, and Workers' Compensation taxes on participating employees. These tax savings reduce or eliminate altogether the various costs associated with offering the plan. Meanwhile, employee satisfaction is heightened because participating employees experience a "raise" at no additional cost to the employer.
Increased participation equals greater tax savings to the employer. Thus, to promote participation in the plan, employers may wish to contribute to each employee's FSA account.
Benefits to the Employee
An employee who participates in the FSA must place a certain dollar amount into the FSA each year. This "election" amount is automatically deducted from the employee's check (for that amount divided by the number of payroll periods). For example, an employee is paid 24 times a year, and elects to put $480 in the FSA. Thus, $20 is deducted pre-tax from each paycheck and is held in an account (by the plan administrator) to be reimbursed upon request.
With the new Carryover provision implemented on October 31, 2013, employees can carryover up to $500 of unused Medical FSA funds from one plan year to the next with no fees or penalties. Carryover ensures the participating employee a safety net when determining how much money to set aside in a medical FSA each year. Employees can contribute funds with more confidence, knowing that they will not lose their funds (maximum carryover is $500) at the end of the plan year.