Is a Section 125 plan required by law?

Is a Section 125 plan required by law?

Income tax savings for the employee: A Sec. 125 plan is required for employers who want to allow employees to choose the qualified benefits they want and avoid paying income taxes on the amount of wages they contribute to obtain those benefits.

What is IRS Code Section 125?

A section 125 plan is the only means by which an employer can offer employees a choice between taxable and nontaxable benefits without the choice causing the benefits to become taxable. A plan offering only a choice between taxable benefits is not a section 125 plan.

What is Section 125 Premium Only Plan?

A Section 125 premium-only-plan (POP), is a cafeteria plan which allows employees to pay their health insurance premiums with tax-free dollars. Using a Section 125 POP to pay for insurance premiums benefits both employers and their employees.

When should I update my Section 125 plan document?

Section 125 of the Internal Revenue Code (the Code) requires that Premium Only or Cafeteria plan documents be updated every five years. This means drafting a new document and giving a copy to every employee eligible for the plan.

What is a Section 125 Premium Only Plan?

What are the main rules about IRS Section 125?

Section 125 Premium Only Plan Rules & Regulations. IRS code Section 125 allows an employer to set up a Premium Only Plan (POP), where an employee’s insurance premium contributions can be deducted from his or her payroll on a pre-tax basis.

What are the rules for Section 125?

The rules in IRS Section 125 require each cafeteria plan to be governed by a written plan document. Plans are only allowed to offer certain benefits. Plans have to pass non-discrimination tests and follow compliance rules about things like notifications. Rules allow for several types of cafeteria plans.

Does the 125 plan affect my tax return?

Also called cafeteria plans because the employee typically has an array of options to select from, the 125 plan allows an employee to deposit a fixed amount or a percentage of his salary into a special account. The employee can withdraw money from this account to pay the qualified expenses. Such plans have little effect on your tax return.

What expenses are allowed in a section 125 cafeteria plan?

In a section 125 plan or cafeteria plan, employees can pay qualified medical, dental, or dependent-care expenses on a pretax basis, which has the effect of reducing their taxable income as well as their employer’s Social Security (FICA) liability, federal income and unemployment taxes, and state unemployment taxes where applicable.

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