The most basic example of a Section 125 Plan is one in which employees make a contribution toward the cost of medical insurance. If a Section 125 Plan is in place, that employee contribution may be made on a pre-tax basis.
The taxes saved for the employee are federal income tax, state income tax in most states, and FICA (Social Security and Medicare) tax.
The taxes that are saved for the employer are the matching portion of FICA.
EXAMPLE:
| With Section 125 Plan |
Without Section 125 Plan |
|
|---|---|---|
| Monthly Gross Pay: | $2,500 | $2,500 |
| Pre-tax health insurance premium: | 270 | 0 |
| Taxable Gross Pay: | 2,230 | 2,500 | Applicable Taxes: | 795 | 891 |
| After-tax health insurance premium: | 0 | 270 |
| Net Spendable Income: | 1,435 | 1,339 |
| Increase In Monthly Spendable Income: | 96 | |
| Increase In Annual Spendable Income: | 1,152 |
Important notice: Information is provided as general guidance on the subject covered and is not provided as legal advice. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of your situation. The laws, regulations and court decisions in this area change frequently. Answers are believed to be correct as of the posting date. The completeness or accuracy of this information may be affected by changes in the laws, regulations or court decisions that occur after the date this was posted.
