Section 125 PlansSection 125 Plans

Presented byPresented by

Susan E. Poliquin, APA, CPASusan E. Poliquin, APA, CPA

Third Party Administrators, Third Party Administrators, Inc.Inc.

What is a Section 125 Plan?What is a Section 125 Plan?

A Section 125 Plan (also referred to as a A Section 125 Plan (also referred to as a Cafeteria Plan) is a program that Employers Cafeteria Plan) is a program that Employers can use to help Employees pay for certain can use to help Employees pay for certain expenses with pre-tax dollars such as:expenses with pre-tax dollars such as:

1.1. Group insurance premiums;Group insurance premiums;

2.2. Out-of-pocket medical expenses; andOut-of-pocket medical expenses; and

3.3. Dependent care expensesDependent care expenses

Does a Cafeteria Plan Have to Does a Cafeteria Plan Have to consist of all 3 parts?consist of all 3 parts?

No. A Plan can be a Premium Only No. A Plan can be a Premium Only Plan (POP); orPlan (POP); or

A Plan may consist of Premium Only A Plan may consist of Premium Only plus Flexible Spending Accounts for plus Flexible Spending Accounts for medical and/or dependent caremedical and/or dependent care

What is a Premium Only Plan What is a Premium Only Plan (POP)?(POP)?

Employees who are paying any Employees who are paying any portion of their employer-sponsored portion of their employer-sponsored group insurance (single or family group insurance (single or family coverage) may do so under the Plan coverage) may do so under the Plan on a before-tax basis.on a before-tax basis.

This includes premiums for major This includes premiums for major medical, dental, vision, LTD, STD, medical, dental, vision, LTD, STD, Group Term Life up to $50,000Group Term Life up to $50,000

How does a Section 125 Plan How does a Section 125 Plan benefit an Employee?benefit an Employee?

Allows them to pay for uninsured and Allows them to pay for uninsured and unreimbursed medical expenses and unreimbursed medical expenses and dependent care expenses on a pre-tax basis. dependent care expenses on a pre-tax basis.

Contributions are exempt from Federal, State, Contributions are exempt from Federal, State, FICA taxes resulting in more take home pay.FICA taxes resulting in more take home pay.

Most employees would not qualify for a Most employees would not qualify for a medical tax deduction.medical tax deduction.

Many employees derive more dependent care Many employees derive more dependent care benefits from Section 125 planbenefits from Section 125 planthan tax credit.than tax credit.

How does a Section 125 Plan How does a Section 125 Plan benefit an Employer?benefit an Employer?

Employer saves matching FICA taxes on Employer saves matching FICA taxes on every dollar that an employee runs every dollar that an employee runs through a Section 125 Planthrough a Section 125 Plan

Cost Control – an employer can control Cost Control – an employer can control the company’s share of medical costs the company’s share of medical costs without limiting employee choiceswithout limiting employee choices

Recruit and Retain Quality EmployeesRecruit and Retain Quality Employees

What benefits can be included What benefits can be included in a Section 125 Plan?in a Section 125 Plan?

Accident or health plan coverage including Accident or health plan coverage including Group Health, HMOs, PPOs, self-insured Group Health, HMOs, PPOs, self-insured medical reimbursement plans, health FSAsmedical reimbursement plans, health FSAs

AD&D coverageAD&D coverage Hospital Indemnity or Cancer InsuranceHospital Indemnity or Cancer Insurance STDSTD LTDLTD Group Term Life up to $50,000Group Term Life up to $50,000 Dependent Care Assistance Program (DCAP)Dependent Care Assistance Program (DCAP) HSA ContributionsHSA Contributions

How much can be contributed How much can be contributed to a Section 125 Plan?to a Section 125 Plan?

PremiumsPremiums - the amount necessary to cover the - the amount necessary to cover the premiums.premiums.

Health FSAsHealth FSAs - there is no statutory limit. The - there is no statutory limit. The amount is set by the Employer. Rule of thumb is amount is set by the Employer. Rule of thumb is that it should not exceed the annual salary of the that it should not exceed the annual salary of the lowest paid person.lowest paid person.

Dependent CareDependent Care - the statutory maximum for - the statutory maximum for most people is $5,000 unless their tax filing most people is $5,000 unless their tax filing status is Married Filing Separately then the status is Married Filing Separately then the maximum is $2,500maximum is $2,500

Will Social Security Benefits be Will Social Security Benefits be affected?affected?

PossiblyPossibly

Because the employee is contributing Because the employee is contributing less into Social Security, it is possible less into Social Security, it is possible that benefits may be slightly reduced. that benefits may be slightly reduced. For most people the current tax For most people the current tax savings (usually between 23%-35%) savings (usually between 23%-35%) is much greater than any potential is much greater than any potential reduction in Social Security benefits.reduction in Social Security benefits.

Who is Eligible to Participate in Who is Eligible to Participate in a Section 125 Plan?a Section 125 Plan?

Only Employees may participateOnly Employees may participate Sole Proprietors, Partners in a Sole Proprietors, Partners in a

Partnership, LLC Members and more Partnership, LLC Members and more than 2% owners of an Subchapter S than 2% owners of an Subchapter S Corporation may Corporation may notnot participate in a participate in a Section 125 Plan nor can their Section 125 Plan nor can their spouses and lineal descendants and spouses and lineal descendants and ascendants.ascendants.

Who Can Sponsor a Section Who Can Sponsor a Section 125 Plan?125 Plan?

Any employer with employees subject to U.S. Any employer with employees subject to U.S. income taxes can sponsor a cafeteria Plan income taxes can sponsor a cafeteria Plan for its employees, no matter what its size.for its employees, no matter what its size.

Eligible employers include corporations Eligible employers include corporations (subchapter S or subchapter C), (subchapter S or subchapter C), partnerships, nonprofit organizations, partnerships, nonprofit organizations, government entities, LLCs, LLPs and sole government entities, LLCs, LLPs and sole proprietorships.proprietorships.

Non-Discrimination in Section Non-Discrimination in Section 125 Plans125 Plans

Section 125 Cafeteria Plans can not discriminate Section 125 Cafeteria Plans can not discriminate in favor of Highly Compensated or Key in favor of Highly Compensated or Key Employees. Certain tests must be performed Employees. Certain tests must be performed annually to ensure that the Plan is not operating annually to ensure that the Plan is not operating in a discriminatory manner. These tests include:in a discriminatory manner. These tests include:

●● Eligibility TestEligibility Test●● Contributions and Benefits TestContributions and Benefits Test●● 25% Key Man Test25% Key Man Test●● 55% Average Benefits Test55% Average Benefits Test●● More than 5% Owners Concentration TestMore than 5% Owners Concentration Test

Does the Plan have to be Does the Plan have to be based upon a Calendar Year?based upon a Calendar Year?

The Plan Year may be any one of the The Plan Year may be any one of the following:following:

Calendar Year to match employee W2s;Calendar Year to match employee W2s; Fiscal Year to match employer tax year;Fiscal Year to match employer tax year; Fiscal Year to match health insurance Fiscal Year to match health insurance

year.year.

How are Health FSAs How are Health FSAs Funded?Funded?

Money is deducted from employee’s Money is deducted from employee’s paypay

Money is deposited into Employer’s Money is deposited into Employer’s general asset account to await general asset account to await reimbursement; orreimbursement; or

Money is deposited into trust account Money is deposited into trust account set aside for reimbursementsset aside for reimbursements

What are eligible medical What are eligible medical expenses in a Health FSA?expenses in a Health FSA?

IRS defines medical expenses as IRS defines medical expenses as "Amounts paid "Amounts paid for the diagnosis, cure, mitigation, treatment, or for the diagnosis, cure, mitigation, treatment, or prevention of disease, and for treatments prevention of disease, and for treatments affecting any part or function of the body. The affecting any part or function of the body. The medical care expenses must be primarily to medical care expenses must be primarily to alleviate or prevent a physical or mental defect or alleviate or prevent a physical or mental defect or illness.” illness.” Listed below is a list of some qualified Listed below is a list of some qualified medical expenses:medical expenses:

Routine Medical CareRoutine Medical Care Prescription DrugsPrescription DrugsCorrective Vision ExpensesCorrective Vision Expenses Dental and OrthodontiaDental and OrthodontiaMedical EquipmentMedical Equipment Copays & Deductibles Copays & Deductibles X-RaysX-Rays Lab WorkLab WorkMost Over-the Counter DrugsMost Over-the Counter Drugs

What are Ineligible Medical What are Ineligible Medical Expenses in a Health FSA?Expenses in a Health FSA?

Insurance PremiumsInsurance Premiums Long-term Care ExpensesLong-term Care Expenses Personal Hygiene products including Personal Hygiene products including

toothpaste and toothbrushestoothpaste and toothbrushes Over-the-Counter Drugs if used for Over-the-Counter Drugs if used for

general well beinggeneral well being Illegal operations, treatments and Illegal operations, treatments and

drugsdrugs

What Rules Apply to Health What Rules Apply to Health FSA Reimbursements?FSA Reimbursements?

Expenses must be incurred during coverage period. Expenses must be incurred during coverage period. Expenses must be for services provided to a Expenses must be for services provided to a

participant, a participant's spouse, or a participant's participant, a participant's spouse, or a participant's dependent. dependent.

Expenses must be permitted under the Plan. Expenses must be permitted under the Plan. Expenses must be primarily for a medical purpose. Expenses must be primarily for a medical purpose. Expenses must not be paid for or payable under Expenses must not be paid for or payable under

other insurance. other insurance. Expenses would not have been incurred "but for" Expenses would not have been incurred "but for"

the medical condition.the medical condition.

Elections and Election ChangesElections and Election Changes A participant cannot add, terminate, or A participant cannot add, terminate, or

change benefits at will during the plan change benefits at will during the plan year.year.

A participant can only change their A participant can only change their election during the annual enrollment election during the annual enrollment period or if the participant has a valid period or if the participant has a valid change in status.change in status.

Newly Hired Employees make elections Newly Hired Employees make elections once they complete the service period.once they complete the service period.

Terminated employees’ coverages will Terminated employees’ coverages will be terminated unless eligible for be terminated unless eligible for COBRA continuation.COBRA continuation.

What is the Uniform Coverage What is the Uniform Coverage Rule?Rule?

Applies to Health FSAsApplies to Health FSAs Maximum Amount of reimbursement Maximum Amount of reimbursement

must be available at all times during must be available at all times during the period of coverage – can not be the period of coverage – can not be restricted by contributions received restricted by contributions received from participant.from participant.

Employer must advance money for Employer must advance money for reimbursement if contributions to date reimbursement if contributions to date from participants are not sufficient.from participants are not sufficient.

What is meant by Use-it-or-What is meant by Use-it-or-Lose-it?Lose-it?

Cafeteria Plans are prohibited from allowing Cafeteria Plans are prohibited from allowing participants to carry over unused contributions participants to carry over unused contributions from one year to another, therefore, a from one year to another, therefore, a participant will “forfeit” the unused amounts participant will “forfeit” the unused amounts he or she has contributed during the plan he or she has contributed during the plan year. year.

A limited exception allows cafeteria plans to A limited exception allows cafeteria plans to provide for a grace period of up to 2 ½ months provide for a grace period of up to 2 ½ months after the end of a plan year to use up any after the end of a plan year to use up any remaining funds from the prior year.remaining funds from the prior year.

Proper Planning is KeyProper Planning is Key

Participants should set aside Participants should set aside contributions for contributions for plannedplanned expenses expenses only.only.

Not recommended for emergencies Not recommended for emergencies or “what ifs”.or “what ifs”.

Follow through with treatment is key Follow through with treatment is key (ie dental, Lasik etc.)(ie dental, Lasik etc.)

Dependent Care Claims Must Meet the Dependent Care Claims Must Meet the Definition of Employment-Related Definition of Employment-Related

Expenses.Expenses. Expense enables the employee (and the Expense enables the employee (and the

employee’s spouse) to be gainfully employee’s spouse) to be gainfully employed.employed.

Expenses must be for the care of one or Expenses must be for the care of one or more qualifying individuals.more qualifying individuals.

Day care must be for dependent 12 or Day care must be for dependent 12 or younger or a disabled spouse or younger or a disabled spouse or dependent. dependent.

How Does a DCAP Work?How Does a DCAP Work?

A dependent care FSA generally works in the A dependent care FSA generally works in the same manner as a health care FSA. The major same manner as a health care FSA. The major differences between the health care and differences between the health care and dependent care FSA are:dependent care FSA are:

1.1. There are statutory maximums for DCAP;There are statutory maximums for DCAP;2.2. Uniform Coverage Rule does not apply, Uniform Coverage Rule does not apply,

participants will only get back what they put participants will only get back what they put into the Plan;into the Plan;

3.3. There is more flexibility to change during the There is more flexibility to change during the Plan YearPlan Year

Dependent Care ProvidersDependent Care Providers

Qualified ProvidersQualified Providers Day care servicesDay care services General purpose day campsGeneral purpose day camps BabysittersBabysitters Pre-schoolPre-school

Non-Qualified ProvidersNon-Qualified Providers Overnight campsOvernight camps Cannot pay your spouse or any other Cannot pay your spouse or any other

dependent of yoursdependent of yours Cannot pay a child under 19, even if he/she is Cannot pay a child under 19, even if he/she is

not your dependentnot your dependent

How are Reimbursements How are Reimbursements From Health FSAs and DCAPs From Health FSAs and DCAPs

Made?Made?Reimbursements may be made using one or more Reimbursements may be made using one or more of the following methods:of the following methods:

Check directly to the participant;Check directly to the participant; Debit CardDebit Card Credit CardCredit Card Direct pay to the provider of servicesDirect pay to the provider of services

**Claim forms and receipts may be required to **Claim forms and receipts may be required to substantiate some or all of the expenses.**substantiate some or all of the expenses.**

How is a Section 125 Plan How is a Section 125 Plan Established?Established?

Plan Documents must be adoptedPlan Documents must be adopted Enrollment meetings are conductedEnrollment meetings are conducted Election Forms are filled out by Election Forms are filled out by

participantsparticipants Payroll is notified about the Payroll is notified about the

deductions deductions Funding is establishedFunding is established

Thank you for your Thank you for your attention!attention!

Feel free to contact me with further Feel free to contact me with further questions or comments. questions or comments. spoliquin@tpainc.net or 666-5799 or 666-5799 ext. 115ext. 115