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AIRPORT JOBS e-UPDATE: News for employers |
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Section 125 helps employers control costs, improve benefits Airport Jobs e-UPDATE, January 20, 2004
Section 125 of the Internal Revenue Code can help employers establish programs that enrich benefits plans while controlling and maintaining costs today and into the future. The essence of Section 125 is this: Companies can give their employees the opportunity to pay for benefits on a pre-tax basis, lowering payroll-related taxes for both the employer and employees. Section 125 - a no-cost "raise" Employees reduce taxes because their pre-tax contributions toward premiums or “spending accounts” (more on those below) are not subject to federal income or social security taxes. Employers save similarly, on their portion of FICA and FUTA. Furthermore, employees receive benefit improvements at a time when such improvements are unlikely, due to cost pressures. Employers experience a renewed appreciation from their employees. The company, in effect, is giving the employee a “raise” without the cost of the raise coming from the employer. No modifications are necessary to a company’s existing benefits program. The addition of Section 125 is an enrichment, not a change - though many employers find that implementing the program provides an excellent opportunity to make benefits plan changes that meet total compensation goals. Choices available to fit differing needs Section 125 offers several possibilities. Three of the most commonly used are Premium Only Plans, Flexible Spending Accounts and Cafeteria Plans. Premium Only Plans (POP) The most basic use of Section 125, allowing employees to pay for broadened insurance coverage with pre-tax dollars. Common components of POP’s include:
FSA are a means for employees to pay for certain out-of-pocket health care or dependent care costs with pre-tax dollars. The employee contributes a predetermined amount through regular pre-tax salary reductions, and is reimbursed for all expenses up to the amount he or she has deposited. Planning is the key: unused employee contributions are forfeited and revert to the employer to offset administrative costs or are given back to participants on a per-capita basis. A Health Care Spending Account is used to pay for almost any genuine medical expense not covered by a group plan (either medical, dental or vision), such as:
This alternative gives employers the opportunity to gain control over their benefit expenditures through a “cafeteria” or menu-like plan. The is a more complex alternative that changes the way employees receive benefits. Instead of providing a determined set of benefits (such as a medical plan and $50,000 of life insurance), each employee is given an amount of “benefit dollars” roughly equal to the employer’s expenditure for that person’s benefits. The employee then chooses from a menu of benefits and determines those that best fit his or her needs. Of course, the employer determines the available options. Although a Cafeteria Plan is a little more expensive to implement, employers ultimately save money through the more efficient plan design, as well as the tax-effective and cost effective vehicles of delivery. To learn more Employers of nearly any size can take advantage of Section 125. A wide range of companies offer services administering the various Section 125 plans. For more information about them, search the web for “Section 125”. To learn more about Section 125, visit the IRS website at www.irs.gov or click on the links below to download related publications: |
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