IRS Code Section 125
Taxes are never a great deal of fun. However, the more that you learn
about the various laws and regulations the easier they become.
Corporations and small businesses can do quite well learning more about
Internal Revenue code section 125 for their employee benefit plans.
This section code 125 was adopted by the IRS in 1978 through an act of
Congress. This code offers the opportunity for employers to let their
employees pay for their benefits on a pretax basis. This approach lessens
the employees’ gross income according to their contributions to their own
Lowering the gross income is very important to both the employer and the
employees. The Internal Revenue code section 125 is designed to lower
payroll taxes for both parties. The employee saves money because he is
taxed on less income and the employer pays less payroll-related taxes.
There are a few alternatives offered by the IRS pretax benefit plan.
Companies and employees can choose between Premium Only Plans, Cafeteria
Plans and Flexible Spending Accounts. Each offers a different approach to
taking advantage of the pretax IRS benefit plan.
The fundamental approach is the Premium Only Plan. This plan under the
Internal Revenue code section 125 is the most basic and one of the more
popular choices. This choice is pretty clear cut. Employees simply pay
benefits as pretax. This lowers their taxable income which in turn lowers
how much tax they have to pay.
On the other end of the spectrum is the Cafeteria Plan. This approach is
much more complex because employees choose from a “menu” of different
benefit options. This plan is complicated because each employee has a
benefit plan catered to his specific needs rather than a set blanket plan
offered by the company.
Even though the Cafeteria Plan is the most expensive to implement,
everyone saves money in the long run. The initial investment may be a
good option for some companies especially if there isn’t a big turnover
in employees. Both the employer and the employees benefit from this
The median in the IRS code section 125 is Flexible Spending Accounts. The
employees pay for some health care costs out of their own pockets. This
is also on a pretax basis.
The more employers learn about the laws and regulations the easier it is
to make sound decisions about employee benefits. A great place to start
is the Internal Revenue code section 125.