As most employers understand, one of the main benefits of offering employee benefits is the pre-tax advantage it offers both employees and employers. And yet, a surprising number of employers are not taking employee premium contributions pre-tax and do not have a system set up to do so. This runs means missing out on the pre-tax benefits allowed by the IRS.
The idea of a Section 125 Plan comes from the IRS code that carries the same name. In a nutshell, it allows for “qualified benefits” to be paid for by employees on a pre-tax basis, therefore lowering the taxable income, so employees withhold less for social security, federal and state and local liability. As a result, employees receive a larger net check and employers can potentially enjoy a tax reduction as well.
In order to implement and sponsor a benefit plan correctly, the employer needs documentation on hand identifying their plan as a Section 125 or “POP” plan. This process is as simple as paying for and having on file an IRS approved document that multiple third party administrators have handy. The most critical part of a Section 125 Plan is taking the necessary steps to secure this documentation so that, should you need it down the road, you have it on file.
As an employer sponsoring a health insurance plan, make sure you are taking full advantage of the pre-tax benefits by putting a Section 125 plan and the proper documentation in place.