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Author Topic: Appendix II of the USRP - Payroll & Remuneration  (Read 7130 times)
 
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« on: March 30, 2009, 03:57:15 PM »

Can anyone provide some clarification on Sections 125's?

How about Afflac benefits paid by employees?

And for the first time I found an employer funded health savings plan!

I am seeing more and more HSA's (health savings accounts) some as part of a 125 some pre tax but not part of the 125 plan (?).  


Any assistance would be helpful.

« Last Edit: July 14, 2017, 11:29:47 AM by auditor1 » Logged
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« Reply #1 on: March 30, 2009, 07:42:29 PM »

Section 125 of the Internal Revenue Code (You must login to view links.
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U.S. Code, Title 26, Section 125
), enacted by Congress in 1978, allows employers to deduct employee contributions for qualified benefits on a pretax basis.  Pretax benefits lower payroll-related taxes for both the employer and their employees.  The technical definition of a Cafeteria Plan is any benefit plan maintained by an employer that allows each participant to select among cash and one or more qualified nontaxable benefits.  But in practice, the term "Cafeteria Plan" (sometimes referred to simply as a flexible benefit plan) seems to be evolving into a generic term for any benefit plan that allows an employee to have some choice in designing his or her own benefit package by selecting different types and/or levels of benefits that are funded with nontaxable employer dollars.  The types of plans that fall under this definition include:

1. Premium Only Plans (POP's) - Employees can use pretax payroll dollars to pay for group insurance premiums offered by their employer, including: medical insurance, dental insurance, vision care insurance, group term life insurance, long-term/short term disability insurance, and accidental death and dismemberment insurance.

2. Flexible Spending Accounts (FSA's):

  • MEDICAL - Employees can use pretax payroll dollars to pay for a wide range of out-of-pocket medical expenses, including: co-payments, deductibles, prescription drugs, dental care, vision care, eyeglasses, contact lenses, chiropractic care, psychological counseling, and eligible over-the-counter items.  Employers set the annual limits for employee contributions to medical FSA accounts.

  • DEPENDENT CARE - Employees can use pretax payroll dollars to pay for dependent care that enables employees and their spouses to work, look for work or attend school full-time.  Eligible expenses include day care or after-school care for a child under age 13 or care for a spouse or adult dependent who is physically or mentally incapable of self-care.  The federal government sets the annual limit for contributions to dependent care FSAs.

3. Defined Contribution (DC) Health Plans are health plans in which the employer provides the participant a contribution of a fixed dollar amount, as opposed to a fixed benefit often in the form of customized "benefit credits" or "benefit bucks" which employees can use to purchase certain benefits.  Benefit credits can be structured so that employees can purchase certain core benefits to deposit into Flexible Spending Accounts, to buy other insurance coverage or even to be paid in cash.

A Health Savings Account (HSA), is a tax-advantaged medical savings account available to U.S. taxpayers who are enrolled in a High Deductible Health Plan (HDHP).  An HSA is ONLY available in conjunction with an HDHP.  HSA's are regulated primarily by IRS Section 223, but can be funded through a Cafeteria Plan.  HSAs were established as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and were intended to replace the Medical Savings Account (MSA) system.  Perhaps the most significant difference is that employers of all sizes can offer an HSA account and insurance plan to employees, but MSAs were limited to the self-employed and employers of 50 or fewer people.  Employees can use pretax payroll dollars to fund their HSA.  But unlike a Flexible Spending Account (FSA), the funds roll over and accumulate year after year if not spent.  HSAs are owned by the individual (so they're portable), which differentiates them from the company-owned Health Reimbursement Arrangement (HRA) that is an alternate tax-deductible source of funds paired with HDHPs.  Funds may be used to pay for qualified medical expenses at any time without federal tax liability.  Withdrawals for non-medical expenses are treated very similarly to those in an IRA in that they may provide tax advantages if taken after retirement age, and they incur penalties if taken earlier.  These accounts are a component of Consumer Driven Health Care (CDHC), which is a hybrid of DC Health Plans.

Aflac is supplemental health and life insurance.  If premiums are deducted on a pretax basis as part of an employer's Cafeteria/Flexible Benefits Plan, they are excludable as well.  If the auditor has any doubt that an employer's plan may not be a qualified one, ask to see the plan document.

This seems to be an ever evolving topic, and we can expect more changes yet to come.  However, just remember that payments made to such pretax plans can be excluded from workers' compensation premium computation in California as long as (1) the employee's contribution is for welfare or fringe benefits (not deferred compensation, 401k's, pension, retirement), and (2) these amounts are shown individually by employee and summarized by code.

In Oklahoma, do not include the amount by which an employees salary is adjusted under a flexible benefit plan under You must login to view links.
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Title 74 Oklahoma Statutes §§ 1341-1348
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No other states allow this credit for workers comp premium computation.
« Last Edit: March 30, 2009, 07:55:27 PM by auditor1, Reason: deleted smiley » Logged
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« Reply #2 on: March 30, 2009, 07:53:57 PM »

Here are some good resources...

  • See You must login to view links.
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    IRS Publication 969
    for a summary of HSA's, MSA's, FSA's & HRA's.
  • Here's a You must login to view links.
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    Cafeteria Plan glossary of terms
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    Final Report of the Working Group on Health Care Security Consumer-Directed Health Care Arrangements
    from the Department of Labor provides lots of detail regarding Consumer Driven Health Care.
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« Reply #3 on: March 31, 2009, 11:46:04 AM »

Wow!  Excellent reply! Thank you for providing this information to all of us!


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« Reply #4 on: March 31, 2009, 03:10:57 PM »

As I was writing my response, I kept reminding myself to include this information but, alas...I forgot: 

I once ran into a situation (probably, around 2003?) where an insured wanted me to exclude pretax transportation deductions.  I ran it by the Bureau at that time and was told it did not qualify for exclusion from premium computation.  I don't recall their rationale exactly, but I believe it was because these amounts were not part of the employer's Section 125 plan.  Just because a pretax payroll deduction is permitted by law does not mean it is part of a Section 125 plan and should, therefore, be excluded.  The pretax deduction for transportation expenses is not part of Section 125 of the IRS code.

The authority permitting employers to allow employees to allocate a portion of their salary to pay for certain transportation expenses on a pretax basis is found in the Internal Revenue Code Section 132 and the Transportation Equity Act for the 21st Century (TEA-21).  Under IRS Section 132 and TEA-21 qualified transportation expenses generally include payments for the use of mass transportation (for example, train, subway, bus fares, bicycles, etc.), and for parking (parking a vehicle in a facility that is near the employee's place of work, or parking at a location from where the employee commutes to work).  For 2009 the maximum monthly pretax contribution for mass transit is $120.00, and $230.00 for parking, however the $120.00 Commuter Expense was increased to $230.00 on February 17, 2009 by President Obama when he signed The Emergency Economic Recovery Act.  The transportation fringe benefit is similar to the pretax Flexible Spending Accounts available for medical expenses and dependent care, however, the transportation benefit does not include a "use it or lose it penalty," as do FSA's.
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