Group Insurance Benefits: Section 125 Plans

What are Section 125 plans?

One type of group insurance benefits that an employer may offer are Section 125 plans. These Section 125 plans are also known as cafeteria plans, flexible benefit plans, or mini-flex plans. Section 125 of the Internal Revenue Code that describes these plans first appeared in the tax code in 1978, but did not gain popularity until the tax laws changed in 1986 and gave employees greater tax advantages.

The purpose of the code was to allow employers to have a separate written plan for their employees that gave them the opportunity to receive certain fringe benefits before taxes. All plans are strictly regulated by the IRS and must meet specific requirements and regulations that can and do change. The written plan must specifically describe all benefits and establish eligibility and election rules. Due to strict guidelines, many employers offering these plans are administered by an outside source.

How do flexible benefit plans work?

Each payroll through a deduction from their paycheck, the participant contributes money to an Expense Account. This money is not taxed. The employer (or third party administrator) then reimburses the participant from this account for health care expenses not covered by a health insurance policy or a health care provider.

The participant’s expenses are fully reimbursed up to the maximum amount of his or her annual choice at the time the claim is submitted. Expenses must be incurred during the plan year as long as they are covered by the plan. All funds remaining in the expense account at the end of the plan year will be forfeited.

These plans run for one year at a time. At the beginning of the plan year, the participant chooses how much to contribute, which is called an annual election. A participant can have two Spending Accounts; one for themselves (called a Health Care Account) and one for their dependents (called a Dependent Care Account). The health care account and the dependent care account are treated separately, so funds from one account cannot be transferred to the other account.

When deciding what the annual election should be, the participant should consider their health insurance deductibles and copayments, as well as uninsured medical, dental, vision and hearing expenses. Covered uninsured expenses must be “medically necessary” as determined by a physician or health care provider.

You may see some generalized expense categories listed when people talk about what expenses are covered. These can include things like:

> Unreimbursed medical expenses resulting from charges for hospital, medical, dental, orthodontic, vision, and prescription drug expenses incurred.

> Deductibles and copayments resulting from charges for hospital, medical, dental, orthodontic, vision, and prescription drug expenses incurred.

> Long-term rehabilitation services to include drug and alcohol addiction.

> Health care expenses that meet the medical expense requirements for federal income tax purposes.

In reality, there is much more to eligible expenses. See the detailed list at the end of this article for this year’s eligible expenses.

Why are flexible benefit plans good?

From the employer’s point of view, you are offering your employees an added benefit and helping them save money on their taxes.

From an employee’s point of view, you save taxes and pay for health care expenses that are not covered by a health insurance policy or a health care provider with money set aside for you through payroll deductions. So when these expenses are due, you don’t have to pay them out of your daily cash flow.

Without a 125 Plan, you have no pre-tax deductions for premiums, child / dependent care, or other out-of-pocket medical expenses.

Let’s say you make $ 26,000 a year. Without the pre-tax deductions allowed by a 125 Plan, you would be taxed on the entire $ 26,000. At a federal income tax rate of 15%, a state income tax rate of 3%, and a social security tax of 7.65%, you would be taxed a total of $ 6,669.00 on your income of $ 26,000. if i didn’t have a plan 125.

If you had a 125 Plan and paid $ 1,000 for premiums, $ 5,000 for child / dependent care, and $ 500 for out-of-pocket medical expenses totaling $ 6,500, you would be taxed on $ 19,500 instead of the full $ 26,000. .

At the same tax rates listed above, you will be taxed a total of $ 5,002.00 if you had a 125 Plan.

And don’t forget that without a 125 Plan you would still have to pay your premium, child / dependent care, or other out-of-pocket medical expenses of $ 6,500.

So what does all of that mean for your take home pay?

Without Plan 125:

$ 26,000 = $ 12,831

With Plan 125:

$ 26,000 = $ 14,498

By participating in a 125 Plan, you would bring home extra year $ 1,667.

Finally, as promised, here is a list of this year’s eligible expenses:

Acupuncture

Alcoholism treatment

Ambulance service

Artificial limbs

Artificial teeth

Body scan

Suspenders

Birth control pills

Braille books and magazines

Automobile expenses for the installation of special hand controls or other special equipment for the use of a person with a disability

Chiropractor

Christian Science Practitioner

Contact lenses, solutions and insurance

Coinsurance

Corrective surgery to improve a deformity arising from or directly related to a congenital anomaly, a personal injury resulting from an accident or trauma, or a disfiguring disease

Crutches

Deductible

Dental fees

Drug and alcohol addiction treatment

Eye exams

Eyeglasses

Eye surgery when performed to correct visual acuity; (example: laser vision correction)

Guide dog or other animal trained to assist people with physical disabilities

Hair transplants as a result of a medical condition.

Hearing aids and batteries

HMO copays

Home improvements or special equipment installed in the home for the primary purpose of health care.

Hospital bills

Vaccines

Hospitalization of the patient for physical or mental illness or injury

Insulin and glucose testing equipment and supplies.

Laboratory fees

Removing Lead-Based Paint From Walls To Prevent Lead Poisoning

Lifetime care fee for medical care only in a retirement home

Accommodation when expenses are primarily and essential for medical care.

Doctor’s fees

Medical information plan

Prescription medical supplies for the treatment of a medical condition.

Medications prescribed by a physician, osteopath, dentist, chiropractor, and / or optometrist

Cost of special housing for people with mental disabilities

Nurse fees

Nursing Home Health Care Fees

Obstetric expenses

Operations

Orthodontics

Orthopedic footwear

Osteopath

Over-the-counter medications such as allergy medications, pain relievers, and cold medications, etc.

Oxygen

Chiropodist

Prescriptions (see medications)

Prosthesis

Psychiatrist

Psychologist

Participation in the smoking cessation program and only prescription drugs

Special schools and education for people with physical or mental disabilities

Special telephone and television equipment for the hearing impaired

Surgical fees

Therapy treatments for a medical condition

Transplant expenses, including payments for surgical, hospital, laboratory, and transportation expenses of a donor or potential kidney or other organ donor.

Transportation expenses mainly and essential for medical care.

Enrollment in a special school for the disabled

Walker

Weight loss program if prescribed by a doctor (excluding the cost of food and / or supplements)

Well-baby and well-child exams

Wheelchair

Wigs required as a result of a medical condition.

X-rays

You should also know about ineligible expenses:

Cosmetic surgery and dental expenses incurred for the general improvement of appearance, including facelifts, hair transplants, waxing (electrolysis), liposuction, teeth whitening (bleaching).

Custodial care in an institution

Funeral expenses

Due health club, gyms, YMCA membership, spas, massages, etc. for the improvement of general health

Domestic and domestic help

Illegal operations, treatment or drugs

Insurance premiums for life, accident and long-term care coverage

Maternity clothes, diaper service, etc.

Over-the-counter drugs, herbs, vitamins, and nutritional supplements purchased for general good health.

Rogaine, unless prescribed to treat high blood pressure

Social activities such as dance lessons or classes (although recommended by a doctor to improve general health)

Special school for a troubled child for the anticipated benefits the child may receive from the course of study and disciplinary methods.

Uniforms

Section 125 Plans They are definitely a good benefit for employers to offer to their employees and a good benefit for those employees to take advantage of.