Pub. 4 2015 Issue 2

March 2015 15 l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s THE BENEFIT OF PRE-TAX MEDICAL PREMIUMS WITH SECTION 125 A RE YOU HAVING YOUR EMPLOYEES PAY their share of the medical premiums with pre- tax dollars? Section 125 of the Internal Revenue Code allows employees to pay for this expense on a pre-tax basis which includes both state and federal income tax as well as FICA which will also reduce the employer FICA expense. In order to provide your employees with this valuable benefit it is necessary and very important that the employer execute and maintain a formal Section 125 plan document. This document will lay out all of the provisions of the plan including the required restrictions on when employees and their dependents can enroll for medical coverage as well as when they are allowed to drop the coverage. These changes are limited, other than at the annual open enrollment, to certain qualified events specifically allowed for within this section of the tax code. Failure to follow these provisions can result in your Section 125 plan being disallowed which would create adverse tax consequences for both the employer and employees. Either at initial enrollment or on an annual basis, the employees should sign a form that shows they agree to the pre-tax deductions and to the restrictions that go along with them. If you are not having employees pay for their share of the medical premiums with pre-tax dollars you should seriously consider adopting a Section 125 plan. If you are allowing pre-tax premiums you need to make sure you have a Section 125 plan document and that it has been kept current with any regulatory changes. If it has not been restated in the last few years it probably needs to be brought up to date. In addition to medical premiums, the pre-tax treatment is available for dental coverage as well as cancer, intensive care and accident coverages. There is also an option in Section 125 (often called flex plans) that allows employees to deduct a certain amount out of each payroll on a pre-tax basis to use for either unreimbursed medical expenses or qualified dependent care expenses that can be a useful way for both employees and employers to save on taxes. By Ed Griffith, EVP-Employee Benefits, KBA Insurance, Inc.