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What is a Section 125 plan?

 

A Section 125 Plan is a type of employee benefit plan in the U.S. that allows employees to choose from a menu of pre-tax benefits. The benefits include different types of insurance such as health and vision insurance, flexible spending accounts (FSAs) for medical care expenses, and other qualified benefits like retirement benefit plans.

 

The (IRS) Internal Revenue Service marks the following benefits as qualifying under the Section 125 plan:

 

 

Who Doesn’t Qualify for Section 125?

 

The following doesn’t qualify for Section 125:

 

  • 1099 employees
  • LLC’s members
  • Collaboration Partners
  • Owner of more than 2% of the S firm

 

How to set up a Section 125 Plan?

 

Creating a Section 125 plan can be complicated, but it is beneficial to consult with a professional to ensure everything is done correctly and on the radar of the law.

 

There are a few more things you’ll need to do to get your Section 125 plan up and running. You need to remember and follow the rules and regulations. Below is an overview look at what goes into creating a Section 125 plan:

 

  • Prepare the required documentation.
  • Inform your staff that a Section 125 cafeteria plan has been generated.
  • Planning with a third-party administrator (TPA) to manage your Section 125 plan and claims.

 

You must conduct yearly non-discrimination testing after providing your Section 125 plan. In case of an audit, you should save all test results on file.

 

Your company’s non-discrimination plan must pass these three tests:

 

  1. Eligibility: No special accommodations should be made in the plan for the company’s highest-paid employee.
  2. Benefits and Investments: The benefits and investments you provide must be accessible to workers of varying income levels as eligibility does
  3. Focus: The value of the compensation package you offer your employees must be at most 25% of the total value of the benefits you offer your employees as a whole.

 

Also, See: Social Security Administration (SSA)

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