SECTION 125 PREMIUM ONLY (Cafeteria) PLAN
IRS Section 125 Premium Only Plans were introduced by the Revenue Act of 1978. Section 125 Premium Only Plans allow employers to reduce payroll taxes by making one simple adjustment to the payroll process. Under a Section 125 Premium Only Plan employees elect to pay their portion of health insurance premiums on a pre-tax or tax-free basis rather than on an after-tax basis. This creates savings for both the employee and the employer.
How Employees Benefit. Employees save 20 to 40% of their pre-tax Section 125 premium deductions. The tax savings are on city, state and federal income taxes, including Social Security and Medicare taxes on money used to pay their portion of insurance premiums. Employees take home pay in increased which helps reduced the cost of providing health coverage for family members.
How Employers Benefit. Employers benefit by reducing the matching Social Security and Medicare taxes, and sometimes Federal and State unemployment taxes. Depending on the state, employers may also be eligible for worker's compensation savings.
Who Can Participate. Regular corporations, 5 corporations, limited liability companies (LLCs), partnerships, sole proprietors, professional corporations, and not-for-profits can all reduce payroll taxes by establishing a Section 125 Premium Only Plan. While the Code prohibits a sole proprietor, partner, members of an LLC (in most cases), or individuals owning more than 2% of an S corporation from participating in the Section 125 POP, owners may still benefit from the savings on payroll taxes by sponsoring the plan for their employees.
Health Flexible Spending Account (FSA)
Flexible Spending Accounts allow employees to use pre-tax dollars to pay medical bills not covered by their insurance. 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, co-pays, 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 up front, then submit a claim and documentation and a reimbursement is made from their own account.
Out-of-pocket expenses include: Eyeglasses and contact lenses; Medical insurance deductibles; Prescriptions; Co-payments; Orthodontia; Chiropractic services; Dental treatments; X-ray and laboratory services.
Other Types of Payroll Deduction Plans
Dependent Care Expenses
Parking
College Savings Plans
