As an employer, finding ways to reduce costs while providing valuable benefits to your employees is key to maintaining a competitive edge. IRS Code Section 125, also known as a cafeteria plan, is a tax-advantaged benefit option that allows employees to pay for certain benefits on a pre-tax basis, lowering both their taxable income and your payroll tax obligations.
In this article, we’ll explain the tax advantages of Section 125, how it benefits both employers and employees, and why BrightPath’s Preventative Care Management Program (PCMP) is the easiest way for employers to implement this program without the administrative hassle.
IRS Code Section 125 allows employers to offer their employees a variety of pre-tax benefits. This could include health insurance, dental and vision coverage, and even dependent care assistance. By offering these benefits on a pre-tax basis, both employees and employers enjoy tax savings.
Instead of paying for benefits with after-tax dollars, Section 125 lets employees pay for certain benefits before their income is taxed. This reduces their taxable income and allows them to keep more of their earnings, while also reducing the employer’s payroll taxes.
For more details on the benefits covered under Section 125, check out What Benefits Are Included in a Section 125 Plan? A Comprehensive Guide
Employers can enjoy significant advantages by offering a Section 125 plan. Here are the main benefits:
With Section 125, employers pay less in payroll taxes (FICA and FUTA) because employee contributions are deducted before taxes are applied.
Employers don’t need to contribute to the cost of benefits, as employees fund their own benefits through payroll deductions.
Offering pre-tax benefits can be an attractive part of an employee benefits package, helping with employee retention and recruitment.
Section 125 is IRS-approved, and employers must follow specific compliance rules, but BrightPath’s PCMP handles compliance and reporting for you.
The primary advantage for employees is the opportunity to save money on taxes. Let’s take a look at an example of how this works in practice.
In this scenario, the employee saves $60 per month ($720 per year) by using pre-tax benefits offered through a Section 125 plan.
Here’s a breakdown of the most common types of benefits that employers can offer under Section 125:
Employees can pay for their medical, dental, and vision premiums with pre-tax dollars.
Employees can set aside money pre-tax for eligible medical expenses, dependent care, and even commuting costs.
Pre-tax contributions for future healthcare expenses.
Help employees cover childcare costs with pre-tax funds.
These benefits reduce employees’ taxable income, which not only boosts their savings but also increases their overall job satisfaction.
While Section 125 offers tax advantages, implementing and managing it can be complex. BrightPath’s Preventative Care Management Program (PCMP) is designed to make the process fully managed and compliant, allowing employers to focus on their business without worrying about the administrative burden.
Here’s why employers choose BrightPath’s PCMP:
BrightPath ensures the program meets all IRS, ACA, and HIPAA regulations, so you can rest easy knowing that your business is fully compliant.
BrightPath handles all setup, integration, and ongoing compliance, so you don’t have to manage the program in-house.
Employees fund their own benefits through payroll deductions, meaning employers don’t need to cover any upfront costs.
With BrightPath’s easy-to-manage program, more employees are likely to participate, which means higher overall benefits for your workforce.
No, participation is voluntary. However, most employees choose to participate because it lowers their taxable income, allowing them to keep more of their paycheck.
Savings vary depending on salary and tax rates, but employees typically save 20-30% on eligible expenses through pre-tax deductions.
Unlike traditional cafeteria plans, BrightPath’s PCMP is fully managed, requiring zero HR involvement. It integrates directly with your payroll system, ensuring compliance and maximizing tax savings.
Implementing a Section 125 plan is an excellent way to save on payroll taxes and offer employees valuable, tax-advantaged benefits. With BrightPath’s PCMP, you can simplify the entire process and ensure compliance with minimal effort.
