Reducing Payroll Taxes without Swallowing the Bitter Pill

By Erickson, Wayne W. | The National Public Accountant, March 1994 | Go to article overview

Reducing Payroll Taxes without Swallowing the Bitter Pill


Erickson, Wayne W., The National Public Accountant


Accountants love to save money for their business clients. Unfortunately, many cost-saving measures require the accountant to swallow the bitter pill--like complicated IRS filings or administrative headaches. There aren't many times when you can save money for your clients in one area without making things more difficult for them, or you, in another. But a properly structured Section 125 plan can offer just such an opportunity for accountants and their business clients.

I.R.C. Section 125 gives you the opportunity to help business clients reduce their payroll taxes and improve their employee benefits without exposure to all the administrative headaches normally associated with other types of benefit plans, like qualified retirement plans or welfare benefit plans. It can strengthen your client relationships.

With a properly designed Section 125 plan, you can demonstrate substantial cost savings through reduced payroll taxes plus reduce personal income taxes for employees. The Premium Reduction Option type of 125 provides substantial tax relief while limiting required administration to the bare bones.

THREE TYPES OF 125 PLANS

Section 125 of the IRC was created to help employers manage the burden of rising health care costs. A Section 125 plan is defined as a plan in which all participants are employees and all participants may choose among two or more benefits consisting of cash and qualified benefits. The cash benefit can include not only cash but a benefit that may be purchased with after-tax dollars. The three types of 125 plans in order of administrative complexity are:

* The Premium Option Plan (POP)

* The Flexible Spending Account (FSA): adds "use it or lose it" concerns and requires the employer to maintain individual employee accounts.

* The Full Menu Plan: combines Qualified Retirement Plans with 125 Flexible Spending Accounts.

Companies of all sizes may institute any of these plans for their employees. The benefits are similar for both the employer and employee: participating employees will save on income taxes and, for employees below the FICA and FUTA tax base, the employer and employee will save FICA and FUTA taxes on the employee funds that pass through the employer's plan.

REDUCING ADMINISTRATIVE BURDEN

Employers generally select the type of 125 plan that maximizes their tax relief while minimizing their administrative burdens. The Premium Option Plan best fills these objectives for many companies. For the most part, FSA and Full Menu Plans require far more administrative attention than most small to medium-sized companies desire or can afford.

Most accountants serving smaller employers shudder at the thought of annually preparing and filing a full Form 5500. However, a Premium Option Plan 5500 is immensely simplified. As more and more accountants are learning, the administrative complexity that comes with FSAs and Full Menu Plans simply does not exist with a Premium Option Plan.

WHY SO SIMPLE?

The Internal Revenue Service considers a Section 125 POP a "fringe benefit plan" rather than a "welfare" or "qualified retirement" plan. Thus, a Section 125 POP is actually quite simple to file. For a Section 125 POP, the Form 5500 or 5500C/R is filed annually (depending on the number of employees). Because "fringe benefit" plans require significantly less 5500 input than do ERISA "retirement" or "welfare" plans, a 125 POP saves considerable time for you, while retaining the full tax savings of the plan for your client.

Consider that with a 125 POP, there is:

* no trust in existence;

* no individual employee; accounts to maintain;

* no unallocated product;

* no actuarial certification;

* no trust assets to monitor;

* no vesting questions;

* no fund balances to track or allocate for each employee;

* no need to valuate employee assets annually; and

* no trustee.

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Reducing Payroll Taxes without Swallowing the Bitter Pill
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