Note: None of this should be taken as legal or tax advice.
Premium only plans (POPs) are a great way for small businesses to save on taxes. Section 125 of the IRS code allows small businesses to make a simple change to the company’s payroll process that reduces employees' taxable payroll. Every employees' premium contribution through a premium only plan (POP) can be deducted from the overall taxable payroll amount.
Here’s 8 benefits small businesses and employees can expect with a Premium only Plan (POP) plan:
- Lower Employer Taxes - Every small business owner needs to take advantage of every tax break they can find. By using a premium only plan (POP), small businesses immediately lower taxes, which means more cash. A reduction in payroll taxes can be quite significant for a small business.
- Lower Administrative Costs - Many group plans feature high administrative costs. With a premium only plan (POP), health benefits costs drop to just $6-12 per employee per month.
- Easy to Set-up - Setting up a premium only plan (POP) is simple and small businesses can administer it online via the payroll system.
- Happier Employees - When employees make more money, they end up happier. By offering employees the ability to use a premium only plan (POP), a small business is automatically putting more money into employees' pockets. Small Businesses can use this to attract and retain quality employees.
- Lower Employee Taxes - In addition to lowering the businesses taxes, employees will also save income taxes with a premium only plan (POP). When they become a member of a premium only plan (POP), they will see a reduction in FICA, federal and state taxes.
- Lower Insurance Costs - For employees who may have trouble making contributions towards their health plan, a premium only plan (POP) plan can allow them to save money on their health plan through the benefits of lower taxes. Even though the premium amounts may be the same as a regular plan, the tax savings that they will experience can help make up the difference.
- Better Coverage - Even though a premium only plan (POP) offers many dollar benefits, it does not skimp on the health benefits. Employees will enjoy full health coverage from a company that they can trust.
- More Take-Home Pay - One of the most popular benefits of a premium only plan (POP) is the ability for employees to take-home more pay each month.
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.
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.
Note: None of this should be taken as legal or tax advice. FSAs (Flexible Spending Accounts) are governed by Section 125 of the Internal Revenue Code. Employees contribute to FSAs through a
salary reduction agreement. The employer may also contribute to an FSA if specified in the plan documents. All contributions are excluded from an employee’s gross income and wages subject to FICA (7.65%). Similarly, employers deduct reimbursements as a business expense and exclude them from wages subject to FUTA (0.8%) and the employer portion of FICA (7.65%).
See
Publication 969 for more information.
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