Section 125 Plans 101

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What are section 125 plans?

Also known as cafeteria plans, section 125 plans allow employees to pay certain benefits on a pretax basis, effectively reducing their taxable income and your Social Security (FICA) liability.

What is a Premium Only Plan (POP)?

A POP is a simple way for employees to reduce health insurance costs while maximizing their tax savings potential. With a POP, employers require employees to pay a portion of their insurance premiums on a pretax basis through payroll deductions, which reduces their taxable income and helps them save on FICA, federal, and (where applicable) state and local taxes as well.

By reducing employees' taxable income, a POP also helps reduce your company's payroll taxes.

How much can a premium only plan potentially save employees on taxes?

Employee	Without POP	With POP
Monthly gross pay	$2,500	$2,500
Before-tax insurance premium	$0	$150
Taxable gross pay	$2,500	$2,350
Applicable taxes	$941	$885
After-tax insurance premium	$150	$0
Net spendable income	$1,409	$1,465
Monthly savings		$56
Annual savings		$672
This example illustrates potential tax savings. Tax savings will vary depending on an individual's tax bracket. The tax bracket used in this example is 37.65%.

How much can a Premium Only Plan potentially save employers on taxes?

Employer
Example shows 15 employees, each contributing $1,200 in pretax medical contributions annually.
Pretax medical contributions:	$1,200
Number of employees:	x15
Total employee contributions	$18,000
FICA factor	x .0765
Estimated annual FICA savings:	$1,377
This example is for illustrative purposes only.

What is a Flexible Sending Account (FSA)?

An FSA provides a way for employees to pay for qualified out-of-pocket health and dependent care expenses not covered by your benefit plans. As a pretax benefit, it's also a powerful savings tool. Participants designate a portion of their pretax salary to be deposited into the plan, effectively reducing their taxable income along with your Social Security (FICA) payroll tax liability.

For applicable state legislation, consult with your tax advisor.

How much can a Flexible Spending Account potentially save employees on taxes?

Employee	Without FSA	With FSA
Monthly gross pay	$2,500	$2,500
Pretax child care contribution	$0	$250
Pretax unreimbursed medical expenses		$20
Taxable gross pay	$2,500	$2,230
Applicable taxes	$941	$840
After-tax child care cost	$250	$0
After-tax unreimbursed medical expenses	$20	$0
Net spendable income	$1,289	$1,390
Increase in monthly spendable income		$101
Increase in annual spendable income		$1,212
This example illustrates potential tax savings. Tax savings will vary depending on an individual's tax bracket. The tax bracket used in this example is 37.65%.

How much can a Flexible Spending Account potentially save employers on taxes?

Employer
The example below shows 15 employees each contributing $1,200 in pretax medical contributions, five employees each contributing $3,500 in dependent care expenses, and nine employees each contributing $1,000 in unreimbursed medical.
Pretax medical contributions	$1,200 x 15 = $18,000
Dependent care contributions	$3,500 x 5 = $17,500
Unreimbursed medical expenses	$1,000 x 9 = $9,000
Total	$44,500
FICA factor	x .0765
Estimated annual FICA savings:	$3,404.25
This example is for illustrative purposes only.

What are the differences between a Premium Only Plan and a Flexible Spending Account?

Both a POP and an FSA can be valuable tax saving tools. FSAs offered through Paychex, Inc. also include a POP, providing even greater benefits than either plan alone.

Section 125 Plan Comparison
	POP	FSA
Pretax premium payments		In combination with a POP
Pretax payment of qualified expensesMedical, dental and dependent care expenses: including co-payments, deductibles, and some over-the-counter medications. not covered by your benefit plans
Reduces employees' FICA, federal, and where applicable, state and local taxes
Reduces employers' FICA payroll taxes* by effectively lowering employee taxable income
Can be integrated with Paychex Payroll for automated contribution deductions and simplified plan administration
A powerful tax incentive to help recruit and retain quality employees
Easy claim submission via secure website or mail	N/A
Optional reimbursement methods: - Direct deposit - Check signing and mailing - Paychex FSA Debit Card
Dedicated toll-free support line

What are your state's section 125 regulations?

The following states require section 125 plans for employers that meet certain requirements. For more information, click on the states below or consult your tax advisor.

• Connecticut
• Massachusetts
• Minnesota
• Missouri
• Rhode Island

Other states have enacted regulations specific to section 125 plans without requiring employers to offer them. For more information about applicable legislation in these states, please consult your tax advisor.

• Florida
• Indiana
• Iowa
• Kansas
• Maryland
• Tennessee
• Utah
• Washington

How can Paychex help administer your section 125 plans?

Paychex helps establish and maintain your section 125 plans by providing legal documentation, compliance testing calculations, and regular status reports to help keep employees' accounts running smoothly.

Section 125 administration is even easier for Paychex Payroll clients. Payroll and benefits can work together to eliminate data entry and improve accuracy by automatically integrating employees' information with your section 125 plans.

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