CAFETERIA PLANS, COBRA, FLEX PLANS AND FSA’s
A Section 125 plan is a Federal program that allows employees to pay for qualified healthcare and daycare related expenses using tax-free dollars that have been deducted from an employee’s paycheck. These plans are commonly called cafeteria plans, POP plans and Flex plans. There are three subsections to Section 125 plans, each addresses a specific area of employee benefits.
Section 106 allows employees to pay their share of group insurance premiums with tax free dollars via a payroll deduction. Also called POP plans (Premium Only Plans) these plans are only for tax treatment of insurance premiums. They are easy to set up, easy to administrate and the cost for documents ranges from free to $250 or more.
Section 105 Participants elect monies to be withheld from their paycheck which are deposited into an account managed bytheir employer or a third party. These dollars are for future medical care expenses not covered by insurance, office visit & Drug co-pays, deductibles, vision and other expenses qualify for reimbursement. Monies not spent during the plan year are forfeited by the employee under the "use-it or lose it" rule. The maximum amount that can be deposited is limited to $2,500in any 12 month period, the employer may set a lower maximum for their plan.
Section 129 establishes dependent care flexible spending account within an employer’s Section 125 plan. Some people
do not benefit from Section 129, you should consult with your accountant before starting any Section 129 contributions.
So How Does a Section 125 Plan Work?
This example compares Before-and-After a Section 125 plan has been implemented.
No Section 125 Plan With Section 125
Gross Pay$1,000 Gross Pay = $1,000
Tax (approx. 25% ) $250 Insurance =$100
Insurance $100Adjusted Gross Pay = $900 (your new W-2 taxable income)
Take Home Pay $650 Tax ( 25% ) =$225
Take Home Pay $675
Other Important Points
- IRS rules prohibit the modification and/or revocation of participant’s elections prior to the beginning of the next plan year unless there is a qualifying change in family status (i.e. marriage, divorce, death of a spouse or child, birth or adoption of a child, termination or commencement of employment, etc.).
- Participants must sign a "Salary Redirection Agreement" that allows them to participate in the plan. Employers must register their plan with the IRS and complete a non-discrimination test each plan year.
- Certain persons cannot participate in the plan including "S" Corporation stockholders, Sole Proprietors and Business Partners. "C" Corporation owners may participate provided the plan passes the non-discrimination test each plan year.
- Your plan must be documented and registered just like a 401(k) plan. We can help you set a program up and many times the cost is $0
What is COBRA?
COBRA (Congressional Ombudsmen Benefits Reconciliation Act) applies to business owners employing a total of twenty or more full and/or part-time employees. An employer must have employed twenty or more employees for at least 20 weeks of either the prior or current calendar year (January-December) for COBRA to apply.
COBRA laws were enacted to protect employees (and their covered dependents) from losing their group insurance benefits for any of the following "Qualifying Events". Termination (except because of the employee’s gross misconduct), reduction in hours, separation of service, elimination of their position, disability and death.
Here are some important facts about COBRA and how you qualify for continuation benefits. This information page is provided for your general information and does not contain all of the provisions of the federal COBRA laws. Since COBRA laws continually change, go to the Federal Department of Labor (DOL) site for more detailed information here www.dol.gov/ebsa/cobra.html
An employee may continue their insurance benefits for up to18 months (longer in certain circumstances discussed below) at their own expense. When and where premiums are due is determined between the employer and employee, generally employees will submit monthly premiums directly to the employer, in some situations premiums will be submitted to a third party administrator.
Who Can Enroll For COBRA Continuance?
- Employees Covered at the Time of Their COBRA Qualifying Event
- Dependents Who Were Enrolled at the Time of the Qualifying Even
This page is not intended to provide tax advice. Consult with your accountant before proceeding with any plan that affects you, your business or your employee’s taxes and/or withholdings. The illustration above, and any information contained here is intended to introduce you to the concept of Section 125 and provide general information only.
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