Employer Terms Glossary Guide
Common Terms You Should Know
Here’s a list of the most common terms you’ll encounter when working with Section 125 Plans. Understanding these terms will help you manage your plan and make informed decisions.
1. Premium Only Plan (POP)
A Premium Only Plan is a simple Section 125 Plan that only covers health insurance premiums. Employees pay for their insurance using pre-tax dollars, reducing their taxable income.
- Why it’s important: POP plans are an easy and cost-effective way for businesses to offer health insurance benefits.
2. Flexible Spending Account (FSA)
A Flexible Spending Account allows employees to set aside pre-tax dollars to pay for out-of-pocket medical expenses or dependent care costs.
- Why it’s important: FSAs help employees save money on healthcare costs, while your business reduces payroll taxes.
3. Dependent Care Assistance Plan (DCAP)
A Dependent Care Assistance Plan lets employees use pre-tax dollars to pay for dependent care expenses, such as daycare or elder care.
- Why it’s important: DCAPs help employees with the cost of childcare and elderly care, while saving them money on taxes.
4. Health Savings Account (HSA)
A Health Savings Account is a savings account that employees can use to save for future medical expenses. They contribute pre-tax money, and the funds grow tax-free.
- Why it’s important: HSAs give employees a way to save money for medical costs, with added tax benefits for both the employee and employer.
5. Cafeteria Plan
A Cafeteria Plan is a flexible benefits plan that allows employees to choose from a variety of benefits, such as health insurance, FSAs, or DCAPs. These benefits are paid for with pre-tax dollars.
- Why it’s important: Cafeteria Plans give employees the flexibility to pick the benefits that suit their needs, while saving on taxes.
Understanding Payroll Deductions
Payroll deductions are the amounts taken from an employee’s paycheck to pay for benefits like health insurance or FSAs. When these deductions are pre-tax, they lower the employee’s taxable income, reducing their tax burden.
- Why it’s important: Pre-tax deductions benefit both employees and employers, as they save money on taxes.
Nondiscrimination Testing
Ensuring Your Plan is Fair:
Nondiscrimination testing ensures that your Section 125 Plan is fair and benefits all employees, not just highly paid ones. The IRS requires this testing to make sure your plan isn’t favoring higher-income employees.
- Why it’s important: By conducting nondiscrimination testing, you ensure your plan meets IRS requirements and avoid penalties.
Eligible and Non-Eligible Benefits
What Can Be Offered Under a Section 125 Plan:
Not all benefits can be included in a Section 125 Plan. The IRS has specific rules about what can and cannot be offered under these plans. Eligible benefits typically include:
Health insurance premiums
FSAs and DCAPs
Commuter benefits
HSAs
Why it’s important: Knowing which benefits are eligible helps you set up a compliant plan and avoid potential issues with the IRS.
Plan Document
The Formal Agreement
A Plan Document is the official written document that outlines the terms and rules of your Section 125 Plan. It’s a legally required document that details how benefits are provided and how the plan works.
- Why it’s important: A Plan Document ensures that your Section 125 Plan is structured correctly and is compliant with IRS regulations.
Highly Compensated Employee (HCE)
A Highly Compensated Employee (HCE) is someone who earns a high salary, typically defined by the IRS as someone who makes over a certain threshold. HCEs may face special rules for participation in Section 125 Plans to ensure fairness.
- Why it’s important: The IRS requires special rules for HCEs to ensure your Section 125 Plan doesn’t unfairly favor high-income employees.
Plan Year
What Defines a Plan Year?
A Plan Year is the 12-month period during which benefits are provided under your Section 125 Plan. It can coincide with the calendar year or a different period, depending on what your business chooses.
- Why it’s important: Defining a Plan Year helps set the timeline for employee elections, plan participation, and reporting.
Open Enrollment
Open Enrollment is the period each year when employees can enroll in or make changes to their Section 125 Plan benefits. During this time, employees can select their benefits for the upcoming year.
- Why it’s important: Open Enrollment is critical for ensuring employees are enrolled in the benefits they need and understand their options.
Mid-Year Election Changes
When Can Employees Make Changes?
Employees may need to make mid-year election changes to their Section 125 Plan due to life events, such as:
Marriage
Divorce
Birth of a child
Change in employment status
Why it’s important: Mid-year changes allow employees to adjust their benefits to reflect life changes, ensuring they’re always covered.
Curious How Much You Could Save by Offering Smarter Benefits?
Section 125 Plans are an easy way to enhance your employee benefits while cutting payroll taxes. Offering tax-free benefits doesn’t have to be complicated or costly. Let us show you how.
Use our Savings Calculator to:
See your estimated payroll tax savings instantly.
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Start now and discover how much you could save!
📣 Disclaimer: Calculations provided are for informational purposes only and do not guarantee specific savings. Actual savings will vary based on individual circumstances.
Book Your Consultation
Explore how Section 125 plans could save your business over $1,000 per W-2 employee each year. Book a free consultation to see how much you could be losing by not having one.
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