Other Matters

Can I allow employees to use the Premium Only Plan for outside insurance premiums?

The only insurance that is eligible to be tax-free under a Premium Only Plan are Qualified Benefit Programs sponsored by the employer, available to all eligible employees and with premiums paid by payroll deduction. Premiums for individual coverage or coverage obtained from a spouse's employer are not eligible.

Should disability coverage be offered on a tax-free basis?

That depends. Disability coverage is eligible, but the IRS will tax either the income spent on premiums or the benefits if the employee becomes disabled.

If the employees pay for disability coverage with tax-free income, the cost is lower and this could boost participation. However if the premium is paid with tax-free income under a Premium Only Plan (or if the premium is paid by the employer), the benefits will be taxable. This will effectively lower the amount that disabled employees would receive.

So it is a trade-off either way. If the premium is taxed, the benefit isn't, and vice versa. One solution may be to offer coverage with higher limits to allow employees to offset the taxes on the benefits.

How can I determine if a cancer and dread disease plan is eligible for tax-free treatment?

This one is simple. Merely contact the cancer insurance company or their representative and ask if the plan is eligible to be offered tax-free under a Section 125 plan. And get the answer in writing.

What impact does this plan have on deferred compensation plan?

In most cases, there is no impact. In some cases, however, an employee's maximum contributions to the deferred compensation plan may be affected. Most deferred compensation plans have maximums that equal the lesser of a percentage of the employee's taxable income or a flat amount. The flat amount applies to employees above a certain income. The percentage applies to lower-income employees. If a lower-income employee participates in a Section 125 plan, the maximum deferred compensation plan contribution is lower, since it is a percentage of taxable income. Most lower income employees do not contribute the maximum into a deferred compensation plan, so few if any people would be affected. You should just be aware of this possibility and make adjustments to deferred compensation plan contributions where necessary. The tax savings affected employees will realize from participation in the Premium Only Plan will far exceed any "lost" tax savings due to the reduction in the deferred compensation plan maximum.

Will my Social Security benefits be affected?

Your Social Security benefits may be slightly reduced, because you are reducing your taxable income. However, for most people the current tax savings (anywhere from a minimum of 23-35%) is much greater than any potential reduction in Social Security benefits.