What are Section 125 Tax Savings Plans?

As a small business owner or HR professional, you can only know so much! Navigating the ins and outs of tax compliance can be a full time job in itself, which is why Employer Solutions Plus offers clients assistance in Section 125 Tax Savings Plans.

What you need to know: A Section 125 Plan provides tax savings for both the employer and employee by reducing employee benefits from gross salary prior to the calculation of federal income and social security taxes. This is allowed under Internal Revenue Code Section 125 – which is where this plan gets its name! You may have also heard this plan referred to as a “Cafeteria Plan” because employees “choose” from a selection of two or more benefits – similar to the cafeteria concept, where visitors choose from different foods.

This plan provides employee participants an opportunity to receive certain benefits on a pre-tax basis. A Section 125 Plan is a separate written plan maintained by an employer for employees that meet the specific requirements of, and regulations of, section 125 of the Internal Revenue Code (IRC). Do your employees meet the specific requirements of the IRC?

How we can help: Employer Solutions Plus can almost immediately tell you upon consultation if your company and employees qualify for such a plan. If your company does qualify, the written plan must specifically describe all benefits and establish rules for employee eligibility and elections – another area Employer Solutions Plus can help with.

Qualified benefits include: accident and health benefits, dependent care assistance, group-term life insurance coverage and HSAs (Health Savings Accounts). If you currently have a plan that only offers employees a choice between taxable benefits it is not considered a Section 125 Plan.

For more information on Section 125 Tax Savings Plans or Cafeteria Plans, contact Employer Solutions Plus today.