Hans Kasper, MS-CPA, PS

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Section 125 - Cafeteria or Flex Plans
 

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Section 125 Medical Reimbursement Plans

Questions and Answers

Section 105 Medical Reimbursement Plans    Site Link

When I worked for the IRS, I saw very few businesses using IRS Section 125 to their benefit.  This section allows the business owners and employees to deduct pre-tax from their payroll checks 100% of their medical insurance and medical expenses as a fringe benefit.  In addition, there is also a pre-tax benefit for dependent care that is far better than the available dependent care credit.  Yes, there are some rules to follow, but the tax savings is well worth it.

Most sole proprietorships (single-owner LLCs) would use Section 105 rather than Section 125; however, Section 125 is most beneficial to C-corporations and S-Corporations where owners and full-time employees are involved.

People often ask me if they have to change medical insurance plans or switch medical care providers.  The simple answer is NO!  This is not a medical plan; it is a tax benefit plan that allows you to take these expenses as a pre-tax deduction from payroll and, thereby, save a significant amount of federal income and social security taxes.

Call my office now at 425-485-7853 to set up a Section 125 Flexplan for your business and start savings taxes.

 


Section 125 Cafeteria or Flexplan

Flexplan is an Internal Revenue Code Section 125 Benefit Reimbursement Plan available to businesses across the nation. Sole proprietors, corporations, limited liability companies, and partnerships utilize the administrative services of Flexplan to save substantial tax dollars annually. Flexplan services allow businesses to deduct pre-tax from their payroll checks their health insurance premiums, out-of-pocket medical, vision, and dental expenses not covered by insurance, and $5,000 per year of dependent care costs

Flexplan includes:

  • Plan Document - Updated to stay within IRS, DOL and ERISA guidelines.
  • Adoption Agreement - To set the guidelines of the employee benefit plan.
  • Required Summary Plan Description - Required under ERISA.
  • Annual Documentation of Benefits Paid - Must be made available for DOL inspection at any time.
  • Third Party Adjudication of Claims

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Questions and Answers

What is Flexplan?

Flexplan is a qualified plan under section 125 of the Internal Revenue Code which allows business owners the opportunity to provide to their employees tax free benefits.

What are these benefits?

These benefits include: medical insurance, medical expenses not covered by the medical insurance, dental insurance, term life insurance, disability insurance, and dependent care costs.

What if I am single, can I still use Flexplan?

Yes, you can, but not as a sole proprietor.  You will have to incorporate your business as a C-corporation to gain the full tax benefit.  It costs about $150 to incorporate a business in Washington if you do it yourself.  It is important to note that there are other tax issues to consider before incorporating as a C-corporation.  Please talk with me before you go ahead with this step.

Does Flexplan sell medical insurance?

No, Flexplan is not an insurance plan.  It is a tax plan that allows your benefits to be deducted tax-free from your paycheck.  Therefore, you are, as always, free to choose the medical insurance plan you wish and the doctors that you elect to serve you.

What will this plan save me in taxes?

Typically, each employee will save between 22% and 35% of their pre-tax benefits in the form of income and social security taxes.  Usually, 7% in social security taxes and 15% or 28% in income taxes.  The employer saves the matching 7% of the social security tax. 

If I already have employees, will I have to provide them this benefit too?

First, if you do not have employees, then you donít have to worry about this.

If you have full-time employees, then you may have to cover them depending on the facts and circumstances.  If you have part-time employees, then it is most likely that they can and will be excluded.

How is this plan administered?

The plan is administered by Flexplan in Wisconsin.  The employer deducts the benefit amounts from the employee's check and remits that amount to Flexplan, then when the employee has a claim to be paid against the benefit, they make a reimbursement request to Flexplan via the internet.  The employer is not involved in maintaining receipts or paying reimbursement requests to the employee.

If I enroll in the plan after the beginning of the calendar year, can I still deduct the medical insurance and expenses for the entire calendar year?

No, you may not.  You may only deduct those expenses after the date of adopting the plan.

What payroll tax returns will I have to file?

You will have to set up your payroll system so that the Section 125 benefits deducted from the employee's paycheck are properly classified and deducted pre-tax.

I heard that you have to file an annual employee benefits tax return with the IRS for Flexplan, is that true?

The form that you are thinking of is a form 5500.  This form is required for section 125 plans with more than 100 employees.

What is the cost to administer Flexplan for my business?

The cost to administer the plan varies with the number of employees.  Please ask for a quote.

Call my office now at 425-485-7853 to set up a Flexplan for your business and start savings taxes.

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This page was last updated on 05/13/2010

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