Many employers struggle to offer an attractive and budget-friendly package of benefits to their valued workforce. At a time when healthcare costs and inflation are driving benefits costs upward, a Section 125 plan can help companies boost their employee benefits while enjoying tax savings and staying within their budget.
A Section 125 plan is an attractive fringe benefit that can play a valuable role in employee retention, increasing take-home pay without changing compensation when approached correctly.
Numerous small and medium-sized businesses have already taken advantage of this tax-saving measure. However, although these plans come with useful benefits for companies, they also come with strict documentation requirements.
Sometimes referred to as a premium-only or POP plan, a Premiums Conversion Plan enables employees to pay for their share of the cost of benefits that qualify using tax-free income; their payroll deductions are taken before the taxes are calculated.
Under Section 125 of the U.S. Internal Revenue Code, employees who are presented with a choice between receiving payment or accepting a benefit, such as health insurance, offered by their employer, will not be subjected to paying income tax for choosing the benefit. Employers also receive a tax benefit in the sense that their contributions to Section 125 Premium Conversion plans will not be subjected to payroll taxes.
Determining Eligibility for Premium Conversion Plans
There are specific definitions and regulations governing who may participate in such a plan. For example, sole proprietors, partners, and S-Corp owners are not eligible. We can help you determine who can participate in these plans.
The Internal Revenue Code requires employers to have a written PCP Plan Document as well as documentation such as enrollment forms indicating that employees have chosen to participate in the plan and are willing to contribute part of their pre-tax salary to pay for the benefits. We can help you ensure you have the proper documentation.
More than 90% of employers do not have current plan material that also complies with the special enrollment rules under HIPAA, putting them at risk of penalties of $110 per day, per employee.
Our PCP Plan documents meet the Section 125 requirements for ensuring employees understand their responsibilities and rights under the plan, including information such as:
- Available benefits
- Rules for participation
- Contribution procedures
- Election procedures
- Plan year
If your company wishes to set up an automatic enrollment process allowing participants to be automatically enrolled into your Premium Conversion Plan without needing to submit enrollment forms, we can help with the process and ensure employees receive the proper notification about their rights to decline coverage. We can also ensure employees receive the required notices outlining the salary reduction amounts for the available levels of coverage.
Although Premium Conversion Plans are not subject to ERISA and therefore do not have to be included in wrap documents, some employers opt to include them in their wraps to keep all of the benefits together in one place. We can help with the creation of these important documents.
Reach Out to The Employee Benefits Specialists at eBen
To learn more about the benefits of Section 125 Premium Conversion Plans and discuss our benefits management and compliance services, reach out to the experienced consultants at eBen today.