Understanding Voluntary Life Insurance Under Section 125

A Section 125 plan, also known as a cafeteria plan, is a type of employee benefits plan that has been in existence since 1978. It offers employees the option to choose from a range of taxable and non-taxable pre-tax benefits, including insurance premiums and other funds. Employees can set aside a portion of their salary on a pre-tax basis to pay for qualified benefits, effectively increasing their take-home pay. This type of plan is particularly beneficial for those with regular medical expenses or childcare costs. While voluntary life insurance can be included in a Section 125 plan, it is not mandatory and employers have the flexibility to choose which benefits to offer.

Accident and Health Coverage

> "an arrangement for the payment of amounts to employees in the event of personal injuries or sickness. A plan may cover one or more employees, and there may be different plans for different classes of employees."

Employers also benefit from offering Accident and Health Coverage as a pre-tax benefit, as they save on taxes as well. For each $200 a month that an employee sets aside pre-tax for Accident and Health Coverage, the employer saves about $15 in taxes. However, these tax savings may be offset by the costs of implementing and maintaining a pre-tax cafeteria plan.

There are some important rules and requirements that employers must follow when offering Accident and Health Coverage as a pre-tax benefit. These include creating a written plan document, limiting employee election changes, and complying with nondiscrimination requirements.

Group Term Life Insurance

The standard amount of coverage is usually equal to the insured employee's annual salary, with premiums based primarily on the insured's age. Employers typically pay most or all of the premiums for basic coverage, with additional coverage available for an extra premium. This extra coverage is often a multiple of the employee's annual salary.

One of the main advantages of group term life insurance is that it is often tax-free up to a certain amount. In the US, the first $50,000 of group-term life insurance coverage provided by an employer is tax-free. Any amount over this must be included in the employees' incomes and is subject to social security and Medicare taxes.

Flexible Spending Accounts (FSAs)

A Flexible Spending Account (FSA) is an employee benefit that allows workers to set aside a portion of their paychecks to cover healthcare and dependent care costs. The money in an FSA is tax-free, and employees can use it to pay for out-of-pocket medical expenses, such as insurance copayments, deductibles, specific prescription drugs, insulin, and medical devices. It is important to note that FSAs are not administered by health insurance providers but can still help reduce income taxes.

Employees decide how much to contribute to their FSA, up to a limit set by their employer. It is also worth mentioning that FSA enrolment must be renewed annually and does not automatically carry over to the next year.

There are three main types of FSAs:

• Health Care FSA (HCFSA): This type of FSA covers any eligible medical costs, such as co-payments or prescriptions. It is available to anyone who is eligible for enrollment under the FEHB program, except those with a High Deductible Health Plan (HDHP) and a Health Savings Account (HSA).
• Limited Expense Health Care Account FSA (LEX HCFSA): This FSA is specifically for eligible dental and vision expenses. It is available to anyone eligible for enrollment under the FEHB program, even if they have an HDHP with an HSA.
• Dependent Care FSA (DCFSA): This FSA covers expenses for dependent care, whether for children or adults. It is available to any NIH employee who is not temporary, seasonal, or intermittent. The maximum contribution for this type of FSA is $5,000 per household or $2,500 for those who are married but filing separately.

If there is money left in an FSA at the end of the year, employers can offer one of two options: employees can either get an additional 2.5 months to spend the remaining funds or carry over up to $640 to the next plan year.

Premium-Only Plans (POPs)

A POP is a simple and smart way for employers to enhance their benefits offerings. It allows employees to access a cafeteria plan without bearing the full cost, while employers amplify their benefits package. By adopting a POP, employers signal that they are committed to fostering a supportive and financially savvy work environment.

A POP can include various insurance products, such as group term life insurance, disability insurance, and even dietary supplements, as long as they align with the cafeteria plan's rules. It's important to note that POPs can only cover premiums for employer-sponsored health plans or individual health policies.

The process for setting up a POP involves creating the necessary plan documentation, including a main plan document, an adoption agreement, and a summary plan description (SPD). These documents outline the plan's benefits, eligibility requirements, and the process for making pre-tax elections. It's recommended to work with a third-party administrator or tax advisor to ensure compliance and avoid penalties.

Employees typically make their POP elections during open enrollment, but they can change their elections during the plan year if they experience an IRS-recognized mid-year election change event, such as a change in marital status, the addition or loss of a dependent, or a change in employment.

By adopting a POP, employers can save on certain payroll taxes, specifically reducing their FICA tax liability by 7.65%. Employees can also benefit from tax savings, with an average of 25% in tax savings.

Full-Flex Plans

A Full-Flex Plan is a type of insurance plan that offers employees a wide range of benefits, including health, disability, life insurance, and dependent care assistance. It is an employee benefit plan that combines both employer and employee contributions to fund various benefits. One of its major advantages is that the benefits received are typically not subject to income tax, resulting in significant tax savings for employees.

Under a Full-Flex Plan, employees can contribute a portion of their gross income to a designated account before taxes are calculated. This pre-tax contribution is a tax-efficient way to pay for certain out-of-pocket health care costs, such as deductibles, copayments, prescription medications, and medical equipment. Employees can also use the funds in their Flexible Spending Account (FSA) to pay for dependent care expenses, such as child care, up to a certain annual limit.

Additionally, employers may contribute to their employees' FSAs, although this is not mandatory. Employers also have the option to offer a "grace period" of up to 2.5 extra months to use the money in the FSA or allow employees to carry over a limited amount to the following year. It is important to note that employers are not obligated to provide these options.

Frequently asked questions