What are Section 125 Plans?

One type of group insurance benefits that an employer may offer are Section 125 Plans. These Section 125 Plans are also known as cafeteria plans, flex benefit plans, or mini-flex plans. Section 125 of the Internal Revenue Code that describes these plans first appeared in the tax code in 1978, but it did not gain popularity until the tax laws changed in 1986 and gave employees greater tax advantages.

The purpose of the code was to allow employers to have a separate written plan for their employees that would provide them the opportunity to receive certain fringe benefits on a pre-tax basis. All plans are strictly regulated by the IRS and must meet specific requirements and regulations that can and do change. The written plan must specifically describe all benefits and establish eligibility and election rules. Due to strict guidelines, many employers who offer these plans have them administered by an outside source.

How do flexible benefit plans work?

Each payroll through a deduction from his paycheck, the participant contributes money to an Expense Account. This money is not taxable. The employer (or Third Party Administrator) then reimburses the participant from this account for health care expenses not covered by a health insurance policy or by a health care provider.

Participant expenses are reimbursed in full up to the maximum amount of their annual election at the time the claim is filed. Expenses must be incurred during the plan year while covered by the plan. Any funds left in the Spending Account at the end of the plan year will be forfeited.

These plans last one year at a time. At the beginning of the plan year, the participant chooses how much to contribute, called an annual election. A participant can have two expense accounts; one for them (called the Health Care Account) and one for their dependents (called the Dependent Care Account). The Health Care Account and the Dependent Care Account are treated separately and therefore funds from one account cannot be transferred to the other account.

When deciding what the annual election should be, a participant should consider their health insurance deductibles and copayments, as well as uninsured medical, dental, vision and hearing expenses. Uninsured covered expenses must be “medically necessary” as determined by a physician or health care provider.

You may see some overhead categories listed when people talk about what expenses are covered. These can include things like:

> Unreimbursed medical expenses resulting from hospital, medical, dental, orthodontic, vision, and prescription drug charges incurred.

> Deductibles and copayments resulting from charges due to hospital, medical, dental, orthodontic, vision and prescription drug expenses incurred.

> Long-term rehabilitation services to include drug and alcohol addiction.

> Health care expenses that meet the medical expense requirements for federal income tax purposes.

In reality, there is much more to eligible expenses. Check out the detailed list at the end of this article to see this year’s eligible expenses.

Why are flexible benefit plans good?

From the employer’s point of view, you are offering your employees an added benefit and helping them save money on their taxes.

From an employee’s point of view, you save taxes and pay for health care expenses not covered by a health insurance policy or by a health care provider with money set aside for you through payroll deductions. So when these expenses are due, you don’t have to pay them out of your daily cash flow.

Without a 125 Plan, you have no pre-tax deductions for premiums, child/dependent care, or other out-of-pocket medical expenses.

So let’s say you made $26,000 a year. Without the pre-tax deductions allowed by a 125 Plan, you would pay taxes on the entire $26,000. With a federal income tax rate of 15%, a state income tax rate of 3%, and a social security tax of 7.65%, you would pay taxes totaling $6,669.00 on your income of $26,000. if I didn’t have a Plan 125.

If you had a Plan 125 and paid $1,000 for premiums, $5,000 for child/dependent care, and $500 for out-of-pocket medical expenses for a total of $6,500, you would pay taxes on $19,500 instead of the full $26,000.

With the same tax rates listed above, you would pay a total of $5,002.00 in taxes if you had a Plan 125.

And don’t forget, without a 125 Plan, you would still have to pay those premiums, child/dependent care or other $6,500 out-of-pocket medical expenses.

So what does all that mean for your net take home pay?

Without Plan 125:

$26,000 = $12,831

With Plan 125:

$26,000 = $14,498

By participating in a 125 Plan, you would bring home extra year $1,667.

Finally, as promised, here is a list of this year’s eligible expenses:

Acupuncture

alcoholism treatment

ambulance service

artificial limbs

artificial teeth

body scan

Suspenders

Birth control pills

Braille books and magazines

Car expenses for installation of special hand controls or other special equipment for use by a person with a disability

Chiropractor

Christian Science Practitioner

Contact lenses, solutions and insurance

coinsurance

Corrective surgery to improve a deformity resulting from or directly related to a congenital anomaly, a personal injury resulting from accident or trauma, or a disfiguring disease

crutches

Deductible

dental fees

Drug and alcohol addiction treatment.

eye exams

Eyeglasses

Eye surgery when performed to correct visual acuity; (example: laser vision correction)

Guide dog or other animal trained to assist people with physical disabilities

Hair transplants as a result of a medical condition

Hearing aids and batteries

HMO copays

Home improvements or special equipment installed in the home for the primary purpose of health care

hospital bills

vaccines

Hospitalization for mental or physical illness or injury

Insulin and Glucose Testing Equipment and Supplies

laboratory fees

Removing Lead-Based Paint from Walls to Prevent Lead Poisoning

Lifetime care fee for medical care in a retirement home only

Lodging expenses when they are primarily and essential for medical care

Medical fees

medical information plan

Medical supplies prescribed for the treatment of a medical condition

Drugs prescribed by a physician, osteopath, dentist, chiropractor, and/or optometrist

Cost of special housing for the mentally handicapped

nurses fees

Nursing home care rates

obstetric expenses

Operations

Orthodontics

Orthopedic shoes

Osteopath

Over-the-counter medicines, such as allergy medicines, pain relievers and cold medicines, etc.

Oxygen

chiropodist

Prescriptions (see Medications)

Prosthesis

psychiatrist

psychologist

Participation in the smoking cessation program and prescription drugs only

Special schools and education for a person with a mental or physical disability

Special telephone and television equipment for a hearing impaired person

surgical fees

Therapy treatments for a medical condition.

Transplant expenses, including payments for surgical, hospital, laboratory, and transportation expenses of a donor or potential donor of a kidney or other organ

Transportation expenses primarily and essential for medical care

Enrollment in a special school for the disabled.

Walker

Weight loss program if prescribed by a doctor (excluding the cost of food and/or supplements)

Well-baby and well-child exams

Wheelchair

Wigs required as a result of a medical condition

X-rays

You must also take into account ineligible expenses:

Cosmetic surgery and dental expenses incurred for general improvement of appearance, including facelifts, hair transplants, hair removal (electrolysis), liposuction, teeth whitening (bleaching)

Custodial care in an institution

funeral expenses

Due health club, gyms, YMCA membership, spas, massages, etc. for the general improvement of health

Home and domestic help

Operations, treatments or illegal drugs

Life insurance premiums, accident and long-term care coverage

Maternity clothes, diaper service, etc.

Over-the-counter medicines, herbs, vitamins and nutritional supplements purchased for general good health.

Rogaine, unless prescribed for the treatment of high blood pressure

Social activities such as dance lessons or classes (even if recommended by a doctor to improve overall health)

Special school for a troublesome child because of the anticipated benefits the child may receive from the course of study and disciplinary methods

uniforms

Section 125 Plans they are definitely a good benefit for employers to offer their employees and a good benefit for those employees to take advantage of.