Paper Trails

What is a Section 125 plan?

A key way to attract and retain employees is by offering a strong benefits package. One type of benefit that small businesses could consider is a Section 125 plan. Let’s take a look at what this plan is.

What is a Section 125 plan?

According to the IRS, a Section 125 plan, provides participants an opportunity to receive certain benefits on a pretax basis. Participants must be allowed to choose among at least one taxable benefit, such as a cash salary, and convert that into a nontaxable qualified benefit. Qualified benefits include:

  • Accident and health benefits
  • Dependent care assistance
  • Group-term life insurance coverage
  • Health savings accounts

The big advantage is that these benefits are deducted from an employee’s wages on a pretax basis. Subsequently, the employee and the employer’s payroll tax liability is reduced as the total wages eligible for tax withholdings is less.

Who benefits from this type of plan?

Those with regular medical expenses can benefit the most from this type of plan. As opposed to having their wages taxed, and then contributions taken and put into the plan, the contributions are taken on a pre-tax basis. For this reason, the contribution amount for participants is increased. Employees, their spouse, and their dependents are eligible for benefits under the plan. Furthermore, former employees of the company may also be covered under the plan.

This type of plan is also beneficial to an employer for a few reasons. First, the tax liability of the employer is lowered since the contributions are taken before taxes are withheld. Secondly, employers that offer these types of plans can be more attractive to current employees and potential candidates.

How to start a Section 125 plan?

Business owners should check with their health insurance broker or company to begin a plan. Often times, the health insurance company may include this in your program or offer a plan to you at a reduced cost. For businesses in Maine, Group Dynamic located in Falmouth is a great option to help you get started.