Understanding IRS Code Section 125

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Payroll taxes are one of those necessary evils that we hate at the time but appreciate later when we reap the benefits they provide – Social Security, Medicare, unemployment insurance, and other social insurance programs.

In order to save money on payroll taxes for both the company and its employees, many business owners set up pre-tax deductions for insurance premiums without understanding the documentation that is required by the Internal Revenue Service (IRS) and the restrictions that apply.

IRS code Section 125 allows an employer to set up a Premium Only Plan (POP) so that employees’ insurance premiums may be sheltered from payroll taxes. This can save an employee up to 40% on payroll and income taxes according to Josh Miner in an article published by PeopleKeep, Inc. The employer also saves on payroll taxes when these premiums are sheltered.

In order to have a qualified POP, the employer must have a Plan Document and Summary Plan Description explaining the rules of the plan. This plan document must be signed by the employer and distributed to all eligible employees.

Employees who are eligible to participate in the company’s benefits plan must sign a POP Enrollment Form, electing to shelter insurance premiums from payroll taxes or waiving participation. If an employee chooses to participate, this election may only be changed during the benefit plan year if there is a qualifying life event. Eligible reasons for changes include:

  • Marital status (adding dependent(s) due to marriage, dropping dependent(s) due to divorce)
  • Number of dependents (birth or adoption of new child, child no longer eligible for coverage through parents due to age or own employment with benefits)
  • Changes to benefit plans (loss of provider or network, increase in costs, reduction in benefits)
  • Employment status (loss of job, reduction in hours, spouse’s employment provides better benefit plan)
  • Change of residence (employee moves out of area covered by benefit plan)
  • Medicare eligibility

Section 125 also allows for a Cafeteria Benefits Plan which provides additional benefits to employees such as flexible spending accounts for non-insured health care costs, health saving accounts, and dependent care costs. There are additional legal requirements for these plans so business owners should consult with a benefits specialist.

An HR professional can help you with all of your human resources needs.

From hiring the right employees, running background checks, creating employee handbooks that include anti-harassment policies and procedures, and so much more, Next Level Solutions can work with you to provide the services that you need to run your business.

For more information about our accounting and human resource services, contact Next Level Solutions at info@nextlevelsol.net or (225) 330-8347.