Pre-Tax Premium Flexible Benefit Plan

MONEY Magazine called it "The Tax Break You Can't Ignore." A flexible benefit plan is a simple program that allows employers to help employees pay for certain expenses (such as health insurance) by pre-tax payroll deduction. Flex plans are extremely popular and effective because employers not only have happier employees with additional take-home pay, but employers also save money on taxes.

Flex plans create additional take-home pay for employees because premium expenses that are commonly after-tax expenses are paid by employees with pre-tax dollars. All employee-paid premiums for eligible group insurance plans are available for this pre-tax treatment. Employee contributions made through the plan are exempt from federal income tax, state income tax, and FICA tax. As a result, employees typically save about 30% on eligible expenses. In other words, for every three dollars of expenses converted to pre-tax status, the employee takes home an additional dollar of income.

The plan also creates payroll tax savings for the employer, creating a “win-win” situation for companies. The employer is exempt from the FICA match (7.65%) on all employee contributions made through the plan. When you consider cumulative savings for all premiums, tax savings over a full plan year can be substantial.

Flex plans (also known as “cafeteria plans” or “pre-tax plans”) are established pursuant to Section 125 of the IRS Code. While Section 125 allows for pre-tax treatment of 3 different categories of expenses, premium-only plans incorporate only one component – qualifying insurance premium.

Qualifying Group Insurance Premiums:

• Group Health Insurance – employee or family
• Group Dental Insurance – employee or family
• Group Term Life Insurance (up to $50,000) – employee only
• Group Disability Insurance – employee only (note: tax implications may make post-tax payment of disability premiums more beneficial for employees)
• Ancillary Products – accidental death & dismemberment coverage; cancer insurance
• Health Savings Accounts – employee contributions

Insurance Coverage that is Not Eligible for Pre-Tax Treatment

• Individual Health Insurance Policies
• Dependent Life Insurance
• Long-Term Care Insurance
• Pre-Paid Legal Services or similar pre-paid professional services

For employers, once the initial details are understood, the plan is easy to understand and operate. For employees, enrollment in the plan is straightforward and easy to understand.

Employee Participation: The plan is normally designed such that employees are automatically enrolled so that all premiums are paid on a pre-tax basis. Where applicable, employees may waive coverage and pay for premiums on a post-tax basis. Insurance premiums are remitted to the insurer as usual, but are now withheld from the employee’s pay on a pre-tax basis rather than a post-tax basis.

Consideration(s): As with all tax-favored benefit plans, there are considerations to know and communicate. For premium-only plans, the main consideration is that employee elections are effective for the full plan year. Employees may not change an election mid-year except in the event of a recognized status change. Otherwise, to gain the benefit of the plan, the Employer must simply establish the plan pursuant to a written plan document and summary plan description and follow IRS rules to protect the significant tax savings for participants and the company.