With a Section 125 plan, both the employers and employees can obtain taxable benefits. Also known as the premium only plan (POP) or cafeteria plan, it allows the employees to convert their taxed-based upsides, such as the salary into non-taxable mileages. Herein, their employers will set aside a portion of such employee’s pretax salary for covering the costs of privileges that the particular employee has qualified for.
In this context, we should be aware that the premium only section 125 plan can be applied by all classes of employers, right from limited liability enterprises, partnerships, sole proprietors, Government organizations, and C and S corporations for benefitting their employees. Thus, all the employees who spent at the minimum of 1,000 working hours for their organization in the previous calendar year automatically qualify for their current year plans.
Who has the Authority to Introduce a Section 125 Plan?
Any qualified employers including, C and S corporations, partnerships, charitable enterprises, sole proprietorships, and LLCs are all eligible to introduce a Section 125 plan for saving their money on the salary-based taxable expenses for their employees. Herein, when such employers are initiating the POP to their qualified staff, they should specifically conduct a fair evaluation every financial year for checking, if the Section 125 plan is not inclined to any high salary personnel in that particular organization.
Who can participate in a Cafeteria Plan?
The employees of any qualified company are only authorized to initiate the Section 125 plan during their yearly open enrolment session that comes under a pre-specified date. These specific periods can be on special occasions such as childbirth or marriages. Herein, the specific employers should supply the necessary information about their certified employees in a summary plan description or SPD, explaining the upsides of the plan, evaluation methods for acquiring the claims, and the specific employee’s privileges.
Why should an Employer Commence a Section 125 Plan?
Constituted under the Revenue Act of 1978, the Section 125 plan or POP is managed and sanctioned by the Internal Revenue Service (IRS) Code Section 125. The prerequisite for a POP emerges, when the qualified employers introduces such a plan for their eligible employees, assisting in reducing both of their tax burdens.
Therefore, the Section 125 plan is a profitable method providing the pre-tax choices for the employers such as initiating benefits of group health insurance, or HSA or Health Savings Account for their employees. Now, such unique plans are particularly for those employers, who are indifferent to provide a comprehensive FSA or Flexible Spending Account plan for their staff, nevertheless desires to offer a partial tax benefit for their workforce.
What are the Fundamental Upsides of Section 125 or the POP for Employers?
Offer Enhanced Coverage to Employees
With reduced tax burdens for the qualified employees through the introduction of the Section 125 plan, the eligible manpower can revel in comprehensive health coverage and spontaneous enhancement in their monthly net income. Therefore, such unique plans are a smart retaining technique for such eligible organizations. Moreover, such crucial steps taken by the employers help in increasing the gratification for their staff, thereby stimulating them to perform better for their employers.
Simpler to Establish and Reduces Employees’ Taxes
The cafeteria plan is pretty simple to initiate for any eligible organization, whereby this unique plan can be administered digitally through an effective payroll management system.
Moreover, the eligible employees of any enterprise can acquire a deduction in the Federal and State Payroll Taxes (FICA), after registering as a qualified participant in the Section 125 plan. Therefore, alleviating such tax burdens for the employees will keep them more satiated.
Lessen Taxes and Administrative Costs of Employers
Again, this innovative Section 125 plan assists eligible employers to instantly minimize their taxes, thereby bringing in increased liquid assets to their enterprise. Since such employers do not have to recompense for the FICA or FUTA taxes, they instinctively retain the taxable earnings of 7.65%, directed as the cost of individual or group health insurance premiums on the payroll taxes for their eligible employees.
Final Verdict
Taking into account such foremost upsides acquired by introducing the premium only section 125 plan, it would be sensible for the employers to request such smart solutions of tax savings from the expert advice of Davidow Financial & Insurance Services, Inc.
