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1 A Section 125 plan is just one of several ways for employers to help employees with funding their HSAs.
Section 125 plans also allow employees to make before-tax contributions to personal spending accounts that can be used for qualifying health-care or child-care expenses.
Employees are free to pay their own premiums through after-tax payroll deduction, but if workers' wages are run through a Section 125 plan, by definition they convert to implicit employer contributions.
Employers who do offer a Section 125 plan must meet state requirements, including paying at least 33 percent of the premium.
Rashke is Chief Executive Officer of Total Administrative Services Corporation (TASC), an employee benefits company that develops and markets Section 105 Plans, Section 125 Plans, pension plans and financial aid planning to small business owners.
The Tax Reform Act of 1986 did nothing to alter their tax advantages; in addition, the Budget Reconciliation Act of 1987 did not follow through on earlier threats to cap Section 125 plan benefits.
Employers that choose to allow employee pre-tax payroll deferrals into an HSA must establish a Section 125 plan (a plan that meets the requirements of Section 125 of the Internal Revenue Code).
List-billing can be done without using a section 125 plan, but adding this tax advantage makes list-billing more attractive.
Texas and Kentucky regulators recently put out bulletins suggesting that they may apply group health requirements to list-bill arrangements if workers use Section 125 plan funds to pay the premiums, or even if employers simply give employees cash and encourage them to use the cash to buy individual health coverage.
The advantages that are afforded by a Section 125 plan are that
In the public sector, Section 125 plans have been used mainly to establish tax-free benefits that are financed entirely by employees through salary reduction.
But a properly structured Section 125 plan can offer just such an opportunity for accountants and their business clients.