Section 125 of the Internal Revenue code allows you to establish a “Cafeteria Plan” where employees may elect to fund benefits on a pre-tax basis. This plan can result in significant employer and employee tax savings. 

At Coordinated Resources Group we are pleased to work with several Third Party Administrators on the design and implementation of section 125 plans for our clients. These plans can include premium only, medical reimbursement, and dependent care accounts. The following is an example of a how a premium only section 125 plan works for an employee with family health plan coverage.

Monthly Factors Without Section 125 With Section 125
Gross Salary $2,000.00 $2,000.00
Insurance .00 $200.00
Taxable Salary $2,000.00 $1,800.00
Income Tax (15%) $300.00 $270.00
FICA (7.65%) $153.00 $137.70
Total Taxes $453.00 $407.70
Net Salary $1,547.00 $1,392.30
Insurance $200.00 .00
Take Home Pay $1,347.00 $1,392.30
     
Monthly Increase   $45.30
Annual Increase in Take Home Pay $543.60

 

A section 125 Premium Only Plan allows your employees to pay their portion of the insurance premium with pre-tax dollars. By participating in your Company’s Premium Only Plan, your employees will save nearly 23% in Federal and FICA taxes. This savings increases your employee’s purchasing power as well as helps to offset the increasing cost of medical insurance.

In effect, section 125 allows participating employees to reduce their taxable salary. This results in lower FICA payments and other payroll taxes for your company. For example, a firm with 30 employees averaging $100 in monthly pre-tax premium deductions would save $2,754 in annual FICA savings.

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