Are you hiding your head in the sand? Iowa’s small employers are walking away from some serious pocket change—for both the employer and the employee. What gives?
They aren’t taking advantage of a well-known section of the Internal Revenue Code (Section 125) that provides tax advantages for premium conversion plans (PCP) and flexible spending accounts (FSA). Hard to say why. Look at the tax advantages.
PCP advantages*:
- allows employees to use pretax dollars when paying their share of premiums for welfare benefit plans (i.e. health and dental insurance)
- reduces employees’ out-of-pocket costs for premiums
- reduces employees’ federal income taxes and Social Security contributions (FICA) and possibly state and local income taxes
- saves employers the 7.65% they would otherwise contribute to Social Security taxes
FSA advantages*:
- allows employees to use pretax dollars when paying for certain qualified medical expenses
- reduces employees’ out-of-pocket costs for eligible medical expenses
- reduce employees’ federal income taxes and Social Security contributions (FICA) and possibly state and local income taxes
- saves employers the 7.65% they would otherwise contribute to Social Security taxes
PCPs and FSAs are easy to communicate and cost little to administer. Simply:
- have a plan document in place
- notify employees of the option
- make payroll deductions on a pretax basis rather than an after-tax basis. Consider hiring an outside flex administrator for FSAs due to protected health information laws.
Seems like a no-brainer. PCPs and FSAs save money for employers and ease the financial burden employees’ face as a result of higher premiums, deductibles, copayments, etc. They cost little to set up and administer. Yet every year without exception in our Iowa Employer Benefits Study©, we find that the smallest employers (those with 2 to 19 employees) don’t take advantage of these tax savings.
Don’t leave money on the table. If you aren’t utilizing the benefits found within Section 125, it’s not too late to start taking advantage NOW!
*This is not intended as tax advice. Visit with your Tax Advisor for more information.
