CBIA Section 125 Premium Only Plan
Frequently Asked Questions
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Are Section 125 Plans mandatory in Connecticut?
Connecticut law requires any employer that provides health insurance benefits, paid at least in part through payroll deduction, to give employees the opportunity to have their contributions excluded from their gross income for state or federal income tax purposes. The law does not define the term employer or include a threshold number of employees, and it applies only when the employer provides health insurance benefits to its employees.
Is Non-Discrimination Testing Required?
In order to qualify for tax-favored status, a Section 125 plan must not discriminate in favor of highly compensated employees (HCEs) and key employees with respect to eligibility, contributions, and benefits. In order to document compliance, an annual test must be performed and the results documented for each Section 125 plan. In 2007 IRS guidelines simplified nondiscrimination testing for POP plans by stating that if all employees can participate and can elect the same salary reductions for the same benefits, the plan is deemed to satisfy the Code §125 nondiscrimination rules because it passes the Eligibility Test, and does not need to satisfy the Contributions & Benefits Test, or 25% Concentration Test. The results are subject to audit by the IRS. To take the Section 125 Non-Discrimination Test, click here.
What is a Section 125 Plan?
An insurance benefit plan that employers may offer under federal tax law that allows employees to pay for health care coverage (and other qualified benefits) on a pre-tax basis. Participating employees’ premium contributions are not subject to state, federal or federal FICA withholding taxes. The resulting tax savings could be as much as 40% of the premium cost. Employers also save on FICA taxes.
What types of employers may establish a Section 125 Plan?
Section 125 Plans are available to:
What is a Premium-Only Plan?
Under federal law, a range of benefits may be offered through a Section 125 Plan. A premium-only plan is a very basic plan option that employers may offer. It allows eligible employees to contribute to the cost of health care coverage on a pre-tax basis. A premium-only plan provides no other benefits to employees.
How do employers establish Section 125 Plans?
Employers should consult their broker, benefits lawyer, payroll vendor and/or accountant and are encouraged to use the documents and tools offered by CBIA.
When must a Section 125 Plan Document be adopted?
Employers must adopt the written Plan Document on or before the effective date of the Plan.
Under a Section 125 Plan, how do employees elect to pay for health care coverage on a pretax
An employee must enter into a salary reduction agreement with their employer, confirming that he/she wishes to pay for health care coverage on a pre-tax basis.
When do employees enroll in the Section 125 Plan?
Federal regulations say that employee elections must be made prospectively:
Is an employee required to participate in his/her employer’s Section 125 Plan?
No. However, if an employee chooses not to participate any premium contributions they make toward health care coverage will be on an after-tax basis.
Are employers required to contribute toward the coverage offered through its Section 125
No. Contributions may be made solely by the employee.
What happens if an eligible employee works for two or more employers?
Employees may only participate in one Section 125 Plan. Employees working for two or more employers must select one employer’s Plan.
Must employers file Section 125 Plan Documents with the IRS?