Section 125 (Flexible Benefits Plan)
An employee can reduce his/her taxable income and avoid paying Social Security and Medicare Tax (5.65%) and Federal Income Tax (15% to 40%) by enrolling in a company-sponsored Flexible Benefits Plan. These tax savings can apply to one or more of the following options:
- Premium Conversion Account allows for the employee portion of qualifying group insurance premiums to automatically be deducted from pay with TAX-FREE dollars.
- Health Care Flexible Spending Account allows employees to pay for health care expenses for himself and his family which are not covered by health/dental/vision insurance including dental, vision, orthodontia, etc. (and even those deductibles or 'co-pays' which are the patient's responsibility), with TAX-FREE dollars.
- Dependent Care Flexible Spending Account allows you to pay for child day care or dependent care expenses up to $5,000 per year TAX-FREE.
The money is held in the plan until you submit a Request for Reimbursement or your employer pays Insurance Premiums.
You can include expenses for your spouse if you are legally married and file a joint income tax return. You may cover your children's expenses if you claim them as dependents on your tax return.
What ASI Does
- Draft Plan Documents including Plan Document, Summary Plan Description and Corporate Resolution
- Key Employee Testing
- Assist in Plan Design
- Assist Broker in Plan Presentation
- Assist in Group Enrollment
- Provide Claims Procedures
- Enter Claims Daily and Disburse Checks Weekly
- Provide Monthly, Quarterly, Annual Reports
- Year-End Plan Review
How You Save Taxes
When you participate in a flexible spending account via salary reduction, you reduce your Federal Income Tax, FICA, Social Security, Medicare and increase your take-home pay. The money that is deposited into your Flexible Spending Account comes straight out of your gross pay, therefore avoiding taxes.
The following example shows how a single person making $30,000 per year can save $1,692 in taxes annually by contributing $550 per month to a spending account.
Tax Savings Illustration
| Without Flexible Benefits Plan |
With Flexible Benefits Plan |
|
| Gross Monthly Salary | $2,500.00 | $2,500.00 |
|
Qualifying Insurance Premiums
|
$0.00 | $100.00 |
|
Qualifying Health Care Expenses
|
$0.00 | $100.00 |
|
Qualifying Dependent Care Expenses
|
$0.00 | $350.00 |
| Total Qualifying Expense | $0.00 | $550.00 |
| Gross Taxable Income | $2,500 | $1,950.00 |
| Income Tax @20% plus F.I.C.A. @5.65% | $641.25 | $500.18 |
| Net Spendable Income | $1,858.75 | $1,449.82 |
|
Post-tax Insurance Premiums
|
$100.00 | $0.00 |
|
Post-tax Health Care Expenses
|
$100.00 | $0.00 |
|
Post-tax Dependent Care Expenses
|
$350.00 | $0.00 |
| Total Post-tax Expenses | $550.00 | $0.00 |
| Net Spendable Income | $1,308.75 | $1,449.82 |
| Increase in Monthly Spendable Income | N/A | $141.07 |
| Increase in Annual Spendable Income | N/A | $1,692.84 |
As you can see, with only $550 in monthly qualified expenses, by enrolling in the Plan, you would have an extra $141.07/month ($1,692.84/year) of spendable income, the amount you would otherwise be paying in taxes.