Offering employee benefits and more importantly, flexible benefits can be costly. One very affordable solution for employers that offers flexibility in employees choosing their own insurance policies and a menu of benefits is combining a Section 125 Cafeteria Plan with an Individual Coverage Health Reimbursement Arrangement (ICHRA).
ICHRAs have numerous tax advantages for both employers and employees. To maximize tax advantages, an ICHRA can be combined with a Section 125 Cafeteria Plan (Premium Only Pretax Plan or POP). Layering in a menu of benefits realize two tax advantages, one by the employer at year-end in their employer contributions and the other realized by both the employer and the employee through the reduction of payroll tax liabilities. Maximizing the advantages of both an ICHRA and a Section 125 Cafeteria Plan can assist employers in building a robust Company Benefits Package.
Section 125 Plans
Employee contributions to a Section 125 Plan are withheld from payroll pre-tax lowering payroll tax liabilities. Some examples of the plans include medical insurance and supplemental benefits like group term life, critical illness, and accident plans. This plan can also expand tax savings to include plans such as Health Flexible Spending Accounts (FSA), Dependent Care (FSA), and Health Savings Accounts (HSA).
How do Employers and Employees Save?
Savings are realized through the addition of tax-free deductions through payroll for both the employer and the employee. With wages reduced, employees can save up to 40% from FICA and income tax. That’s up to $40 in tax savings for every $100 that passes through a Section 125 plan. This payroll liability savings flows through to employers which will have additional tax benefits of up to 10% in matching FICA tax and FUTA.
Section 125 and Individual Insurance Policies
With the introduction of the Individual Health Reimbursement Arrangements (ICHRA) came the ability to pre-tax the difference between the employee’s premium and the employer contribution with a Section 125 Plan in place, through payroll. Certain criteria need to be met for this to happen:
• Employee must be enrolled in the ICHRA Program
• The individual health insurance policy must be purchased off-exchange (ie it cannot be purchased through healthcare.gov or state exchanges). This means directly through an insurance carrier.
• The employer contribution must be less than the employee’s insurance premium. This could include family premiums.
• A Section 125 Plan document must be in place.
Providing the above rules are met, employers can now setup pre-tax payroll deductions. Below is an example of how this might look for one employee. Remember it will look different for all the employees as they get to decide what plan works for them and those costs will vary.
- Joe’s Individual health insurance monthly premium = $600
- Employer ICHRA contribution = $400
- Joe’s monthly pre-tax deduction for payroll = $200
- *Employers can further break this down based on payroll cycles.
ICHRA has proven to be a great alternative for employers to provide tax savings, flexibility, and choice in health care to employees. When employers add a pre-tax plan, other benefits can be layered in for greater tax savings and a bigger benefits package.
Whether ICHRA’s are combined with a Section 125 for tax-free premiums, or layered in with other benefits such as FSA, Dependent Care, and/or Health Savings Accounts they are an advantageous tax shelter to attract and retain talent by implementing these various strategies. The combination of these programs creates benefits packages that are flexible and less costly to both employers and employees.
When it comes to benefit strategies, the Flyte team assists in navigating these strategies so companies can truly maximize tax savings and benefits for employers and employees.