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| Section 125 Plans |
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An exceptional way to enhance your fringe benefit package is through a provision of the Internal Revenue Code, called Section 125. This plan allows an employee of a company to save a considerable amount of money in taxes.
Under a Section 125 Plan, pretax dollars are used to purchase benefits. These dollars may come from non-elective contributions (direct employer contributions, if any) and elective contributions (employee salary reduction contributions).
Advantages to the employer:
- Considered an employee benefit
- Cost saving benefit that will save on the employer-matching portion of FICA taxes for every dollar that the employees reduce their salaries
- Tax reduction by reducing unemployment and worker's compensation taxes
Advantages to the employee:
- Significant tax savings on federal, state and FICA
- Allows an employee to design their own fringe benefit program
- Expenses deducted from an employee's paycheck as a pre-taxed deduction and reimbursed to them for payment will decrease their tax liability
Components of a Section 125 Plan
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Premium Only Plan (POP)
This plan allows employees to make their contributions to group health and group term life insurance with pretax dollars. A Premium Only Plan creates no new benefits. The employer is simply offering a way to obtain favorable tax treatment on benefits already offered. Here's how it works:
Employees' premium contributions are automatically deducted from their salaries before taxes are taken out. Taxable income is reduced by the amount contributed, so employees pay less in taxes and have more take-home pay.
With employee pretax income lowered, employers pay less in Social Security (FICA) payroll taxes (a business should consult their tax advisor for applicable state legislation).
Flexible Spending Account (FSA)
This plan allows employees to use pretax dollars to pay dependent care expenses and medical bills not covered by their insurance. Usually offered in conjunction with a POP, the FSA is a budgeting tool that can help take care of out-of-pocket expenses such as day care, dental and optical care deductibles, copays, and prescription drugs. Like a POP, an FSA helps pay for itself by increasing employee take-home pay while decreasing employer payroll taxes. Here's how it works:
An employee decides how much of their salary should be set aside before taxes are calculated.
This amount is automatically deducted from their paycheck every pay period, just like any other payroll deduction, and is deposited into their FSA account.
The employees would pay their out-of-pocket expenses upfront, then submit a claim and documentation and a reimbursement is made from their own account.
Dependent Care
- Able allocate up to $5000 / household for dependent care expenses
- Care for a child under the age of 13 (daycare)
- Care for a disabled spouse or dependent incapable of caring for him/herself
- Household-related services (i.e., visiting nurse)
Transportation Expense
- Allows employees to save on commuting expenses (to and from work)
- Claim up to $100 / mo. for Transit Pass (Mass Transit - Subway, Train, and Bus) - Tolls are not eligible
- Claim an additional $195 / mo. for qualified parking
Non Employer Sponsored Plan
- Privately purchased insurance premiums including disability, cancer, health and term life insurance can be included in the program
- The premiums for these benefits can be deducted pre-taxed
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| For more information, please e-mail us or contact our staff at 631.499.1180 |
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