What is Section 125?
Section 125 is part of the Internal Revenue Code that allows employees to convert a taxable cash benefit (salary) into non-taxable benefits. Under a Section 125 program, or Flexible Benefits Plan, you may choose to pay qualified benefit premiums before any taxes are deducted from your paycheck.
Why does the government allow a plan such as this?
The plan is governed by the IRS code. Studies have shown that when employees become aware of how much they spend on benefit items, they tend to practice cost containment. The government wants to help employers and employees control escalation of healthcare costs.
Is Section 125 legal?
Yes. Even though Section 125 may sound “too good to be true”, the program is legal and beneficial. The United States Congress created Code Section 125 in an effort to make benefit programs more affordable for employees. Code Section 125 was established in the Revenue Act of 1978.
How can Section 125 work for me?
Your Section 125 program can make your benefits plan more affordable. You can pay for your qualified benefits with pre-tax dollars. By paying for qualified benefits before you pay taxes, you actually lower your taxable income, which means you pay less taxes. Paying less taxes usually results in more spendable income. When you take advantage of your Section 125 program, you will actually get “more for your money”.
What are pre-tax dollars?
Pre-tax dollars are the premiums you pay for qualified benefits under your Section 125 program. These premiums are deducted from your gross earnings – before taxes are taken out.
Who is offering me this plan?
Your employer is offering this Section 125 program and has endorsed it to provide you with an enhanced employee benefits package.
How much can I allocate?
The IRS limits dependent care contributions to $5000 per tax year (joint return). Limits for medical reimbursement plans are set by the employer.
How long does the plan last?
An employee agrees to set aside an amount on an annual basis (the plan year). This amount can be increased or decreased each year. If you do not re-enroll, contributions cease.
What if I want to make a change during the year or I terminate employment?
The IRS allows changes to be made in the event of a ‘change in status’ qualifying event such as birth, death, marriage or divorce or a change to your or your spouse’s employment. If you terminate, your contributions cease when you stop getting paid. Please contact CPA, Inc. for further information.
How do I know if an expense is eligible?
If you would be able to deduct the expense as a medical expense on your taxes, it is eligible. If in doubt, contact CPA, Inc. for verification.
How will I get reimbursed for expenses?
You may submit claims as frequently as you like. Direct deposit (ACH) payments are processed weekly. Paper checks are paid on the 15th and last day of each month; checks are payable to the participant and mailed to their home address. A Dependent care account is usually paid on an automatic basis after completion of a Dependent Care Certification Form. Medical accounts require a copy of the bill or receipt for the service attached to a Claim Voucher.
Can my medical expenses go towards dependent care and vice versa?
No. The IRS requires separate funds for each and they are treated as two separate accounts.
Can I get money back if it is not used?
It is important to calculate your expenses as precisely as possible – the IRS does not allow unused funds to be returned. You will receive statements and warning notices from CPA, Inc. prior to the plan year-end reminding you of your account balances and how you may use them.
Do I have to participate?
No. You are under no obligation to participate in a Section 125 program. However, you are required to sign an election form to indicate your choice
What do I do to participate?
If you decide to enroll in the plan, you will simply need to sign the election form to indicate your participation. At the beginning of the plan year, your paycheck will indicate that the Section 125 program has gone into effect.
Can I enroll in a Section 125 program whenever I want to?
Your employers Section 125 plan is an annual plan. You must enroll in the Section 125 plan during the eligible enrollment period or during the plan year if you experience a qualifying event or change in family status.
