Benefits of a Section 125 Plan
Why does the government allow section 125 plans? The pre-tax dollar incentive provided by section 125 helps both employers and employees control escalating health care costs. Regardless of which type of Section 125 plan is incorporated in the business, the tax advantages are the same.
Savings for Employers
Section 125 plans allow businesses to save Social Security (FICA), as well as federal unemployment taxes (FUTA) and generally, state unemployment taxes, on the money the employees contribute to their premiums. Employer tax savings can average 7 to 10 percent of the employee's contributions. (A tax advisor should be consulted for information on individual state regulations):
EXAMPLE: An employer shows 20 employees, each contributing $100 in pre-tax medical contributions monthly.
Savings for Employees
Premium contributions are automatically deducted from salaries before taxes are taken out. Because their taxable income is reduced by the amount they contribute, employees pay less taxes on the money they earn. Employees see savings in their FICA, Federal, and (in most cases) State, income taxes. When employees become more aware of how they spend money on benefit items, they tend to practice more cost containment, resulting in savings for everyone.