Section 125 plans - questions and answers

With just one simple change in your payroll process, you can reduce the payroll taxes your employees pay and increase their take-home pay. This has been made possible by Section 125 of the Internal Revenue Code, which was created by the Revenue Act of 1978.

With a Section 125 plan, employees do not pay FICA, federal taxes, or state taxes on money used to pay for their portion of employer-sponsored insurance premiums or contributions to a Health Savings Account (HSA). You as the employer save FICA taxes on the employees' contributions for the insurance premiums—usually much more than the cost to administer the plan.

We've included some frequently asked questions and answers below. Simply click on any question that interests you to see the answer. (If you'd like to determine approximately how much you'd save in taxes by implementing a Section 125 plan, please contact Jason Mackey, the managing partner in our Charleston office, at jason@mackeyonline.com or 843.729.5597 for a free worksheet and other guidance.)

Is it expensive to setup and run a Section 125 plan?
You can usually set up a plan for approximately $250. The annual testing and compliance cost is typically the same: about $250 a year. With such low costs, you can easily recoup the cost of setting up and maintaining such a plan.
Can an employer just decide to start a Section 125 plan and begin pre-taxing the insurance cost?
A Section 125 plan is easy to implement, but is also an IRS-monitored program... so you'll need some basic administration and documentation to be in compliance. First you'll need an IRS-approved plan document; then you'll need a plan adoption agreement, a summary plan description to provide to your employees, a certificate of resolution, and election forms.

The kits we use contain this information along with DVDs that explain the program toboth you and your employees. It also contains instructions for maintaining the plan and a simplified explanation of payroll adjustments. The entire process is simple and takes very little time to get up and running.
Can any employer sponser a Section 125 plan?
Regular corporations, partnerships, S corporations, limited liability companies, sole proprietors, and professional corporations can all save money on payroll taxes with a Section 125 plan.
Can anyone participate?
IRS regulations prohibit sole proprietors, partners, members of an LLC (in most cases), individuals owning more than 2% of an S corporation, or their spouse and dependents from participating, but they can still sponsor a plan and benefit from the savings on payroll taxes from the employees insurance premiums.
When can a company start a Section 125 plan?
You can start the plan at any time. You do not have to wait until your fiscal year ends or the beginning of a new calendar year.