About Section 125 Plans
Section 125 plans provide a simple and effective way to add employee benefits, especially for businesses with a number of employees who regularly have medical and childcare expenses.
Employees can deduct their insurance premiums pretax and set aside pretax funds to use toward qualified medical and dependent care expenses. In return, this decreases company payroll and tax liabilities for social security, Medicare, and unemployment.
Section 125 Options
As part of a Section 125 plan, employers can choose to set up a Premium-Only Plan, a Flexible Spending Account, or both.
Premium-Only Plan (POP)
Employees pay their share of health care insurance premiums using pretax dollars. Taxable income is reduced by the amount contributed, 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.
Employee Savings with a POP
The tax bracket used in this example is 37.65%. This example illustrates potential tax savings and will vary depending on an individual's tax bracket. |
| Employee |
Without POP |
With POP |
| Monthly gross pay |
$2,500 |
$2,500 |
| Pretax insurance premium |
$0 |
$150 |
| Taxable gross pay |
$2,500 |
$2,350 |
| Applicable taxes |
$941 |
$885 |
| Post-tax insurance premium |
$150 |
$0 |
| Net spendable income |
$1,409 |
$1,465 |
| Monthly savings |
None |
$56 |
| Annual savings |
None |
$672 |
Employer Savings with a POP
This example shows 15 employees, each contributing $1,200 in pretax medical contributions annually. |
| Pretax medical contributions |
$1,200 |
| Number of employees |
15 |
| Total employee contributions |
$18,000 |
| FICA factor |
x(.0765) |
| Estimated annual FICA savings |
$1,377 |
Flexible Spending Account (FSA)
An FSA helps pay for out-of-pocket medical, dental, and dependent-care expenses that are not covered by other benefit plans.
Expenses that typically qualify with an FSA include:
- Prescription drugs
- Over-the-counter items*
- Co-pays and deductibles
- Eyeglasses/contact lenses
- Chiropractic care
- Child/dependent care
- Non-cosmetic dental procedures
- Orthodontia
- Acupuncture
- Psychiatric care
* Effective January 1, 2011, a prescription is needed for over-the-counter medicines and drugs to be eligible for reimbursement under the health FSA.
Dependent care expenses that typically qualify with an FSA include:
- Care for a child under the age of 13
- Care for a disabled spouse or dependent incapable of caring for him/herself
- Household-related services (e.g., visiting nurse)
Employee Savings with an FSA
The tax bracket used in this example is 37.65%. This example illustrates potential tax savings and will vary depending on an individual's tax bracket. |
| Employee |
Without FSA |
With FSA |
| Monthly gross pay |
$2,500 |
$2,500 |
| Pretax childcare contribution |
$0 |
$250 |
| Pretax unreimbursed medical expenses |
$0 |
$20 |
| Taxable gross pay |
$2,500 |
$2,230 |
| Applicable taxes |
$941 |
$840 |
| Post-tax child care cost |
$250 |
$0 |
| Post-tax unreimbursed medical expenses |
$20 |
$0 |
| Net spendable income |
$1,289 |
$1,390 |
| Increase in monthly spendable income |
None |
$101 |
| Increase in annual spendable income |
None |
$1,212 |
Employer Savings with an FSA
This example shows 15 employees, each contributing $1,200 in pretax medical contributions annually. |
| Pretax medical contributions |
$1,200 |
| Number of employees |
15 |
| Total employee contributions |
$18,000 |
| FICA factor |
x(.0765) |
| Estimated annual FICA savings |
$1,377 |
| Section 125 Plan Comparison |
| |
POP |
FSA |
| Pretax premium payments |
Yes |
N/A |
| Pretax payment of qualified expenses* not covered by your benefit plans |
No |
Yes |
| Reduces employees' FICA, federal, and where applicable, state and local taxes |
Yes |
Yes |
| Reduces employers' FICA payroll taxes* by effectively lowering employee taxable income |
Yes |
Yes |
| Can be integrated with Paychex Payroll for automated contribution deductions and simplified plan administration |
Yes |
Yes |
| A powerful tax incentive to help recruit and retain quality employees |
Yes |
Yes |
| Easy claim submission via secure website or mail |
N/A |
Yes |
Optional reimbursement methods:
- Direct deposit
- Check signing and mailing
- Paychex FSA Debit Card
|
N/A |
Yes |
| Dedicated toll-free support line |
Yes |
Yes |
|
* Medical, dental, and dependent care expenses, including co-payments, deductibles, and some over-the-counter medications
** For applicable state legislation, consult your tax advisor.
|
