IRS Requirement for pre-taxed employee benefits

If you are an employer who wants to allow your employees to pay group health and other supplemental insurance premiums with pre-tax salary deductions, the answer is yes, you need a Section 125 plan document.

In most employer-sponsored group benefit plans, employees pay for health insurance and other qualified benefits with tax-free dollars. It’s just taken for granted; that’s the way it’s done.

However, that tax-advantaged treatment is not automatic. The employer must do it through a Premium-Only Plan (POP) or Cafeteria plan, and to set up one of those, you need a Section 125 plan document.

Tax savings for everyone with a plan document

A Section 125 Premium Only Plan document allows your employees to voluntarily agree to a “salary reduction” so that the employer can pay their insurance premium as a business expense.

The portion of the insurance premium the employee is responsible for is deducted right off the top of income before taxes are calculated. This saves the employee $ .25 to $ .40 on every dollar paid in insurance premiums.

Employers also realize tax savings from reduced matching FICA, FUTA, SUTA, and Worker’s Compensation taxes on all tax-advantaged employee funds.

This tax savings is usually more than covers the costs associated with setting up a plan and administering it. Plus, employees are happy because they experience a “raise” when withholding tax is lowered.

A Section 125 (POP or Cafeteria) plan is “a written plan”

Section 125 is part of the U. S. Code where the Treasury (IRS) lays out the rules for employers wanting to allow employees the option of pre-tax salary deductions to pay group health and related insurance premiums.

The formal definition of a Section 125 plan to pre-tax benefits says:

Section 125 (d) Cafeteria plan defined

For purposes of this section—

(1) In general

The term “cafeteria plan” means a written plan under which—

(A) all participants are employees, and

(B) the participants may choose among 2 or more benefits consisting of cash and qualified benefits.

Understanding “qualified benefits”

Qualified benefits are defined as “not includible in the gross income of the employee” (ref. Section 125(f)). In other words, the premiums are tax-free within a POP or Cafeteria plan.

Those benefits include group health insurance and supplemental benefits, such as group term life insurance, disease-specific insurance, accidental death insurance, and others.

For a complete list of premiums that can or cannot be included as a pre-tax option in Section 125 plans, see Pre-Tax Eligible Premiums in Section 125 Premium Only Plan.

Also, you may want to read: Fixed-Indemnity Sick Pay Taxable in Cafeteria Plans

What does all that mean?

Most employers offer their group health plan to employees through pre-tax (tax-free) salary deductions. It’s just taken for granted that it’s done that way.

However, in order for the employer to be in compliance with laws governing pre-tax treatment of insurance premiums, the company must have a Section 125 plan document in place as defined by the code, which means you need a Section 125 plan document to do it.

• Section 125 of the Code clearly states that “a written plan” is required as part of a Cafeteria Plan that allows employees to choose to participate in a plan with qualified benefits.
• Without a written plan document, the plan is not compliant with Section 125 of the Code.
• Therefore, tax-advantage treatment of employee group benefits is not allowed without a written plan document in place.

Get your written plan today

The written plan must be in place — signed by the employer with the Summary Plan Description and election forms copied to employees — before any pre-tax salary deductions are taken.

Core Documents provides everything an employer needs to establish an IRS- and DOL-compliant plan in the Core 125 plan document package.

We’re the leading provider of affordable Section 125 Cafeteria, Wrap SPD, and Health Reimbursement Arrangement (HRAs) plan documents in the country, so you can trust us to design a personalized package just for you.

Work at no cost or risk with a certified plan consultant via email or call 1-888-755-3373.

Or, go ahead and order your Core 125 plan document package (below) and we’ll call you if we have questions on the information you provide us.

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Deluxe Binder Edition

Save Big with Tax-Free Group Life & Health Insurance Premiums at Work

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$149 one-time fee in PDF email* + Deluxe Binder via USPS

Core Documents provides employers with everything they need to establish an IRS- and DOL-compliant Section 125 benefits plan in PDF format for just $99. This cost reflects a one-time setup fee, not an annual charge.

For an additional $50, employers can choose the Deluxe Binder option that includes the PDF email version plus a printed plan document in a 3-ring binder (shipped via USPS).

And, for just $30 more, you can add the HSA Module for additional tax savings for the employee and the employer.

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