Many companies (and possibly yours as well), are feeling the pressure to economize on their expenses with fewer employees, fewer resources, and smaller budgets.

Labor costs can account for as much as 70% of total business costs according to the U.S. Bureau of Labor Statistics. Yet, according to a recent survey, HR professionals only spend 15% of their time managing the cost of labor. This failure can cause a range of financial and operational issues for businesses, which ultimately reduce profitability.

As a result, companies are looking for solutions to save on personnel costs while at the same time still being able to attract new talent and retain their current workforce.

The Section 125 Plan

One solution to create significant savings and benefits for your business is the Section 125 Plan.

Section 125 of the Internal Revenue Code lets companies establish “Cafeteria Plans” so employees can choose certain benefits (like health insurance premiums, dependent care, or flexible spending accounts) with their pre-tax dollars. 

Not only will your employees benefit from this plan; employers such as yourself will see considerable savings through reduced payroll taxes. Since pre-tax contributions for benefits like FSAs and health insurance premiums lower employees’ taxable wages, your company pays less in Social Security, Medicare, and federal unemployment taxes. These savings can add up, especially for businesses with many eligible employees.

Section 125 Tax Exemptions

According to the IRS, there are a number of tax exemptions related to Section 125 Plans:

• Federal Income Tax Exemptions: One of the primary benefits of Section 125 plans is the exemption from federal income tax on employee contributions. By contributing to a Section 125 plan, employees can lower their taxable income, resulting in substantial tax savings.
• Social Security Tax and Medicare Tax Exemptions: Section 125 plans provide exemptions from Social Security tax (FICA) and Medicare tax for employees and employers on contributions made to the plan. This reduces the tax burden on employees and leads to payroll tax savings for employers.
• State Tax Considerations: It’s important to note that while Section 125 plans offer significant federal tax benefits, state tax regulations may vary. Employers and employees should consult with tax professionals or review state tax guidelines to understand the implications of Section 125 plans on state taxes.
• Reduced Unemployment Taxes.

Examples of Savings

There are different types of Section 125 plans. Each of these types will allow your business to save Social Security (FICA), as well as federal unemployment taxes (FUTA) and generally, state unemployment taxes, on the money employees contribute to their premiums. These tax savings can average 7 to 10 percent of employees’ Section 125 Plan contributions.

Companies can save an average of $600-$700 annually per W-2 employee on payroll taxes (FICA), as employee pre-tax contributions lower taxable wages.

Elevate Benefits improves this offering by introducing the Preventative Care Management Program (PCMP). This integrates smoothly with existing benefits while optimizing employer savings. In contrast to traditional Section 125 Plans, the PCMP presents further opportunities for tax savings. Overall, this makes it an excellent option for businesses seeking to enhance their benefits package while managing costs.

How to Implement a Section 125 Plan in Your Business

If you want to start a Section 125 plan at your company, you will need to establish a written Section 125 Plan Document outlining eligible benefits, participation rules, and administrative procedures. Your employees will have to sign the appropriate salary reduction agreements, which allow them to contribute a portion of their pre-tax salary to pay for the selected benefits.

It will be your responsibility to ensure that your Section 125 plan complies with all applicable regulations and nondiscrimination rules. These rules are designed to prevent plans from favoring highly compensated employees and require that all participants have an equal opportunity to benefit from the plan.

We Can Help

If all this seems somewhat daunting to you, let us remind you that our team at Health Sphere is here to help. We can guide you to find the smartest Section 125 plan for your company, allowing you to enjoy annual savings of up to $700 per employee. Find out how much your business can save today!