Information on Premium Only Plans under Section 125 Cafeteria Plans
The simplest approach to a 125 Cafeteria Plan is the Premium Only Plan. This type of plan converts post-tax employee contributions to pre-tax contributions via salary redirection. Under a Premium Only Plan, the money that the employees would normally have deducted from after-tax dollars would instead be deducted on a pre-tax basis through a simple redirection of their salary.
Through
this mechanism, employee dollars that are spent on eligible benefits avoid
federal income taxes, state taxes and Social Security (FICA) taxes. The
employer avoids having to pay FICA taxes and federal unemployment payroll taxes
(FUTA) on employee contributions. In most states, employees can also avoid
state and local taxes on their pre-tax contributions to a flex plan.
Section 125 of the IRS Code requires that for each employer that establishes a
Premium Only Plan, the following procedures must be followed:
- Prepare a Written Plan Document along with Adoption Agreement and Corporate Resolutions;
- Prepare a Summary Plan Description to be distributed to each eligible employee;
- Obtain signed Election Forms from eligible employees; and
- Enter employee's eligible elections into payroll system on a pre-tax basis
As the Third Party Administrator, BMS LLC assists the employer with the above steps to make sure they are in full compliance with Section 125. This includes the following responsibilities as well:
- Determine if the employer is indeed eligible to offer a Section 125 Premium Only Plan to its employees;
- If they are eligible, complete required Discrimination Testing of Plan; and
- Prepare the required Plan Documents.
Eligible Benefits under a Section 125:
- Health Insurance
- Dental Insurance
- Vision Plans
- Accident Plans
- Cancer Insurance and Hospital Indemnity Plans (not with Return of Premium)
- Disability Insurance (if premium is pre-taxed, benefit will be taxed at time of claim.)
- Group Term Life Insurance up to $50,000
- Contributions to a Health Savings Account
- and other benefits such as vacation days, adoption assistance, etc.
Ineligible Benefits under a Section 125:
- Educational Assistance Programs
- Transportation Fringe Benefits (Section 132)
- Dependent Group Term Life Insurance
- Long Term Care Insurance
- COBRA Premiums
BMS LLC can assist you with full compliance of the rules and regulations of a Premium Only Plan under a Section 125 Cafeteria Plan. Contact sales@bmsllc.net or (502)244-1161 for a proposal of our administrative fees!