The Advantages of Pre-Tax Versus Post Tax Health Plans
Offering what are known as Premium-Only-Plans (POP) or Section 125 plans to employees allows employees to pay their contribution of health care premiums using pre-tax dollars. This has benefits for both the employer and the employee:
For the employee, it is one of the easiest and most efficient ways to decrease healthcare costs and increase spendable income by a significant margin. With a Section 125 plan allowing employees to pay for health premiums on a pre-tax basis, their taxable income decreases. With lower taxable income, employees are required to pay less income taxes, resulting in an overall increase in disposable income for the employees. Employees are able to save, on average, 30% in federal, state, and local taxes that they pay for health premiums. This is an obvious benefit for employees of companies who offer pre-tax health plans, and the benefit extends to the employers as well.
Employers are able to profit from these Premium-Only-Plans in a variety of ways. Since with these POPs employees pay for premiums in a pre-tax basis, overall payroll expenses are reduced. With reduced payroll, the employer enjoys lower costs on workers’ compensation and decreased tax liabilities for social security, unemployment, and Medicare. Employers can save an average of $115 per participating employee in FICA payroll taxes. Employers also profit from these plans, because they attract and maintain higher quality employees with these added income benefits.
Section 125 plans typically cost a small fee to implement (around $125) and is free in some cases, depending on the size of the group. Your payroll company or broker can assist with the POP set up. With the the significant benefits to both employees and employers, many businesses have found that implementing a 125 plan to their current group health plan is an easy decision.