Wednesday, February 24th, 2010
Note: None of this should be taken as legal or tax advice.
Some health insurance agents and tax-professionals are doubting the finality of the
August 2007 Proposed Section 125 Regulations that make this product legal under the Internal Revenue Code.
So, the purpose of today's post is to confirm that the 2007 Proposed Section 125 Regulations are final. Below, I first outline how Proposed Treasury Regulations work and then list the applicable parts of the new Section 125 regulations. If, after reading the below explanation, you remain unconvinced, please contact the IRS.
How it works
All Proposed Treasury Regulations are drafted by the IRS and published in the
Federal Register so that taxpayers may submit written comments or speak at hearings (during the "notice and comment period") before final regulations are published in the
Code of Federal Regulations. The Proposed Regulations become effective when they are published in the Federal Register. After the notice and comment period (which is defined in the Federal Register publication) the Proposed Regulations become "final".
Applying this to the new Section 125 regulations
The Section 125 Proposed Treasury Regulations were published in the Federal Register on August 6, 2007 (
click here to access the Federal Register publication) with an effective date of January 1, 2009.
The notice and comment period for this Federal Register publication ended on November 15, 2007.
The proposed regulations were effective immediately upon their publication in the Federal Register and became final after the note and comment period. While the "final" regulations are currently not available online at the Code of Federal Regulations, they are expected to be made available on
April 1st, 2010.
According to the Federal Register publication, the IRS contact person for these new regulations is "Mireille T. Khoury". Mireille can be reached at 202-622-6080.
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Wednesday, February 17th, 2010
Note: None of this should be taken as legal or tax advice. I get this question all the time from employers and agents: "Can an Employer Contribute to an employee's HSA?" -- its a tough question to answer in one breath because the FULL answer requires an understanding of several different IRS legal term and plans. Anyway, I got the question again today and decided to write a blog post about it. So, here's how employer contributions to HSAs work...
Employers can make tax-free contributions to their employees'
Health Savings Accounts (HSAs) in the following two ways:
- Without a Section 125 Plan
- With a Section 125 Plan (Cafeteria Plan)
Remember that once an employer contributes money into an employee's account, the money is owned by the employee from that point forward, regardless of employment. In other words, employees own the HSA accounts (similar to how they own a checking account) -- They decide how and when the money is spent. Before an employer makes contributions to their employees' HSAs, they should first consider making contributions to an employee's HRA.
Employer Contributions without a Section 125 Plan Employers can make tax-free contributions to their employees' HSAs without using a Section 125 plan, as long as the contributions are "comparable" for all employees participating ("
comparability rules"). Comparable contributions are contributions that are the same dollar amount or same percentage of the employee's deductible for all employees with the same category of coverage (i.e. self-only or family; FT or PT).
Employer Contributions with a Section 125 Plan To avoid the comparability rules on their HSA contributions, employers often utilize a Section 125 plan. HSA contributions through a Section 125 plan are not subject to the comparability rules, but Section 125 nondiscrimination rules do apply. Nondiscrimnation rules restrict employers from making contributions excessively in favor of highly compensated employees. Employers typically use a section 125 plan to offer matching contributions to their employees and to save payroll taxes (7.65%) on all employee contributions.
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Monday, August 17th, 2009
Note: None of this should be taken as legal or tax advice. This post is a follow up to my
previous post about Cafeteria Plans (i.e. Section 125 Plans). One of the most common (if not the MOST common) forms of Section 125 plans is a Premium Only Plan (aka "Section 125 POP", "POP plan", "Premium-only Cafeteria Plans", etc.).
A Section 125 Premium-Only-Plan (POP), is a cafeteria plan which allows employees to pay their health insurance premiums with tax-free dollars. Traditionally, these POP plans have been used in combination with employer-sponsored group health insurance plans. However, beginning January 1st, 2009, employees can now use POP plans to pay individual health insurance premiums with tax-free dollars.
Using Section 125 POP to pay for insurance premiums benefits both employers and their employees.
How Section 125 Premium-Only-Plans (POP) Benefit Employees:
Employees save up to 40% on federal income taxes alone. Under a POP plan, an employee's take-home pay is increased, effectively reducing the cost of purchase adequate health insurance.
How Section 125 Premium-Only-Plans (POP) Benefit Employers:
Employers benefit by reducing their tax liability. With POP, employers do not have to pay FICA/FUTA taxes (~7.65%) on dollars that employees use toward the cost of their individual (or group) health insurance premiums.
States Pass Laws Requiring Employers to Offer Section 125 Premium-only-Plans (POP) to Employees
Most states are considering passing laws effectively mandating that employer offer Section 125 POP plans to their employees. The following states have already passed similar legislation.
| State |
Law/Program |
Description |
| Connecticut |
SB 1484 |
Requires any employer providing health insurance benefits paid partly through payroll deductions to offer a cafeteria plan, effective October 1st, 2007. |
| Florida |
S. 2535 |
Requires an employer who chooses to participate in the Cover Florida Health Care Access Program to offer a Section 125 plan |
| Indiana |
Tax Credit Program |
Requires that an employer offer a Section 125 plan to be eligible for certain tax credits. |
| Iowa |
HF 2539 |
Requires the Commissioner of Insurance to "assist employers with twenty-five or fewer employees with (voluntarily) implementing" Section 125 POP plans. |
| Kansas |
SB 81 |
Requires all insurers to offer POP plans. |
| Maryland |
Working Families and Small Business Health Coverage Act |
Requires employers (with 1-9 employees) who participate in a subsidized plan to offer Section 125 plans. |
| Massachusetts |
Chapter 58 of the Acts of 2008, section 48 |
Requires all employers with >10 employees to offer a POP Plan. |
| Minnesota |
SF 3780 |
Requires all employers with >10 employees (who do not offer health insurance) to offer a Section 125 Plan for individual policies. |
| Missouri |
HB 818 |
Requires all employer providing health insurance benefits to offer a Section 125 plan. |
| Rhode Island |
SB 448 |
Requires employer with >24 employees to offer a Section 125 POP. |
| Tennessee |
S 333 & G 3360 |
Requires employers (who offer Section 125 plans) to automatically pay insurance premiums through a Section 125 plan. |
| Washington |
SB 5930 |
Requires employers who participate in the state's Health Insurance Partnership program to offer premium-only cafeteria plans. |
How Do Employers Administer POP Plans?
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Thursday, August 6th, 2009
Note: None of this should be taken as legal or tax advice.
I am writing this post because I realize most Americans do not understand how a Cafeteria Plan (also known as a "Section 125 Plan") works. The amazing thing is that virtually all Americans utilize (or have access to) a Cafeteria Plan at some point during their working career, yet many do not take full advantage of them. As a tax-paying American citizen, you should understand how a Cafeteria Plan works because, when utilized correctly, a Cafeteria Plan can increase your take-home-pay without any change in your expenditures.
A "Cafeteria Plan" (see
Section 125 of the IRS Code) is a benefit provided by an employer which allows an employee to contribute a certain amount of his or her gross income to a designated "account" before taxes are calculated. This "account" can be used to reimburse the employee for insurance premiums, medical, or dependent care expenses throughout the plan year or claim period as the employee incurs qualified expenses.
Essentially, a cafeteria plan allows an employee to reduce their gross income, effectively reducing the amount they pay in Federal, Social Security, and some State taxes. This amounts to a savings of between 25% and 40% of every dollar they contribute to the plan. The employer also realizes savings on FICA withholding tax for each participating employee.
Ask your employer about Cafeteria Plans because they save you and your company money on taxes. Utilizing a Cafeteria Plan correctly should result in an increased net paycheck.
Some common examples of Section 125 Plans include:
1) Premium Only Plan (aka POP, to be discussed in a future blog post)
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