Understanding Section 125 Plans
A Section 125 plan, also known as a cafeteria plan, allows employees to use pre-tax dollars to pay for qualified benefits. This reduces taxable income, benefiting both employers and employees. The plan is fully compliant with IRS, ACA, and HIPAA regulations, ensuring businesses can offer tax-advantaged benefits without legal concerns.
Eligible Benefits Under a Section 125 Plan
The IRS defines specific benefits that can be included under a Section 125 plan. Below are the most common pre-tax eligible expenses:
1. Health Insurance Premiums
Employers can allow employees to pay for medical, dental, and vision insurance premiums using pre-tax dollars. This includes:
- Employer-sponsored group health plans
- Dental and vision insurance premiums
- Health Maintenance Organization (HMO) and Preferred Provider Organization (PPO) plans
2. Flexible Spending Accounts (FSAs)
Employees can contribute pre-tax funds to cover eligible healthcare and dependent care expenses.
- Health FSAs: Cover medical, dental, vision, and prescription expenses not covered by insurance.
- Dependent Care FSAs: Help cover childcare expenses, such as daycare, preschool, and after-school care.
3. Health Savings Accounts (HSAs) Contributions
Employers may allow employees to contribute to HSAs on a pre-tax basis, provided they are enrolled in a high-deductible health plan (HDHP). HSA funds can be used for:
- Medical expenses, prescriptions, and doctor visits
- Dental and vision care costs
- Long-term care expenses
4. Dependent Care Assistance
A Section 125 plan may include dependent care benefits, allowing employees to use pre-tax income for:
- Daycare and preschool
- After-school programs
- Elder care for dependent family members
5. Group Term Life Insurance (Up to $50,000)
Employers can offer group-term life insurance as a tax-free benefit, provided the coverage does not exceed $50,000. Any coverage above this limit is taxable under IRS rules.
6. Accident and Disability Insurance
Employees can use pre-tax contributions for short-term and long-term disability insurance. These policies provide income protection in the event of an injury or medical disability preventing work.
7. Adoption Assistance Programs
Certain Section 125 plans may include adoption assistance, allowing employees to use pre-tax dollars to cover adoption-related expenses, including:
- Legal fees
- Adoption agency costs
- Court expenses
8. Supplemental Health Benefits
Some Section 125 plans allow employees to pay for additional voluntary benefits, such as:
- Critical illness insurance
- Hospital indemnity plans
- Accident insurance
What is NOT Covered Under a Section 125 Plan?
While Section 125 plans cover a wide range of benefits, some expenses are explicitly excluded by the IRS, including:
- Non-medical benefits such as gym memberships and wellness programs
- Educational assistance and tuition reimbursement
- Commuter benefits, including parking and transit passes (covered under a separate Section 132 plan)
- Long-term disability insurance premiums paid by the employer
- Life insurance coverage above $50,000
Compliance and Legal Considerations
IRS and ACA Regulations
All Section 125 plans must adhere to IRS Code Section 125, ensuring they comply with pre-tax benefit eligibility rules. Additionally, plans must be structured in accordance with Affordable Care Act (ACA) requirements to avoid penalties.
HarmoniCare’s fully managed Preventative Care Management Program (PCMP) ensures:
- 100% IRS, ACA, and HIPAA compliance
- Seamless payroll integration with providers like ADP, Paychex, and QuickBooks
- Annual plan audits and updates to meet changing regulations
For more details on compliance, see How a Section 125 Cafeteria Plan Helps Businesses Save on Taxes and Benefits
FAQs
Can employees change their Section 125 plan benefits at any time?
No, employees can only change their pre-tax benefit elections during open enrollment or if they experience a qualifying life event, such as marriage, birth of a child, or job loss.
Are all employers eligible to offer a Section 125 plan?
Most employers, including corporations, partnerships, LLCs, and non-profits, can implement a Section 125 plan. However, self-employed individuals are generally not eligible.
Do Section 125 plans require employer contributions?
No, employers are not required to contribute to employee benefits under a Section 125 plan. However, many choose to provide matching contributions for HSAs or FSAs to enhance employee retention.
How do Section 125 plans affect employee paychecks?
Since benefits are deducted pre-tax, employees pay less in federal, state, and payroll taxes, increasing their net take-home pay.
How does an employer set up a Section 125 plan?
Setting up a Section 125 plan requires legal plan documents and compliance oversight. HarmoniCare provides turnkey administration, ensuring smooth implementation and compliance.
Take the Next Step Toward Smarter Benefits
A Section 125 plan is an easy way to reduce payroll taxes, enhance employee benefits, and stay compliant with IRS regulations. Let HarmoniCare take care of the details while you enjoy the savings and employee satisfaction.
Find out how much your business can save
Website: https://www.harmonicare.com
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