Section 125 Benefits

Section 125 refers to a specific section of the Internal Revenue Code (IRC) that governs the rules and regulations for what are commonly known as "Cafeteria Plans" or "Flexible Benefit Plans." These plans allow employees to choose between receiving cash compensation or selecting certain qualified benefits, such as health insurance or retirement contributions, on a pre-tax basis.

Here are some key points about Section 125 Cafeteria Plans:

Pre-Tax Contributions: Under Section 125, employees can choose to have a portion of their salary withheld on a pre-tax basis to pay for certain qualified benefits. This means that the money used for these benefits is not subject to federal income tax, Social Security tax, or Medicare tax.

Qualified Benefits: Qualified benefits that can be offered through a Section 125 plan typically include health insurance premiums, flexible spending accounts (FSAs) for healthcare and dependent care expenses, and sometimes dental and vision insurance premiums.

Employee Choice: Employees can typically choose from a menu of benefits offered by their employer. For example, they might decide to allocate a portion of their salary to pay for health insurance premiums and set aside pre-tax funds in an FSA for medical expenses.

Open Enrollment: Employers usually provide an open enrollment period during which employees can make changes to their benefit elections for the upcoming plan year.

Use-It-or-Lose-It Rule: Flexible Spending Accounts (FSAs) under Section 125 plans often have a "use-it-or-lose-it" rule, which means that funds not used for eligible expenses during the plan year are generally forfeited unless the employer offers a grace period or a carryover option.

Compliance Requirements: Employers offering Section 125 plans must comply with IRS regulations, including providing proper plan documents and nondiscrimination testing to ensure that the plan does not disproportionately benefit highly compensated employees.

Tax Savings: Section 125 plans can provide tax savings for both employers and employees. Employers can reduce their payroll taxes, and employees can lower their taxable income, resulting in potential savings.

Section 125 plans are valuable tools for employers to offer a range of benefits to their employees while providing potential tax advantages for both parties. However, they require careful administration and compliance with IRS rules to ensure they operate correctly and legally. Employers often work with benefits administrators or consultants to establish and manage these plans effectively.

Koru Korner

Related Articles

No items found.
Article

ILS: Transforming from Competitor to Strategic Partner, Elevating the Reinsurance Sector to New Heights

Artemis Update: AM Best has upgraded its outlook on the global reinsurance sector from stable to positive for the first time in over a decade, highlighting robust profit margins and improved underwriting conditions. The rating agency now views insurance-linked securities (ILS) as strategic partners rather than competitors, emphasizing their role in supporting traditional reinsurers. Despite a deceleration in reinsurance pricing, AM Best notes that underwriting discipline and healthy profit margins are expected to be maintained.

Article

May to Break Another Cat Bond Record: Biggest Month of Issuance Ever

Exciting news in the world of finance and risk management! May is set to break records as the biggest month of catastrophe bond issuance ever. According to a recent article from Artemis, the market is experiencing unprecedented growth, highlighting the increasing demand for innovative risk transfer solutions.

Article

2023 Habitational State of the Market – Casualty

The habitational insurance market is facing a multitude of hurdles when it comes to casualty placements. Casualty markets in the habitational space have been adjusting prices due to increased loss activity and the continued impact of social inflation. Within this landscape, property owners, insurance companies, and brokers are confronted with a new reality. There are few markets offering General Liability (GL) coverage. It’s also difficult to find markets willing to participate in the lead $5M of excess coverage, making the marketplace even more challenging. To succeed in this demanding market, one must strike a careful balance between innovation, robust risk assessment, and adaptability.

Ready to partner with Koru?

Request a Risk Assessment today!