Section 125 Health Plans: A Cure For Rising Health Costs?


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If you’ve got a small business, then you’ve also got a great opportunity to create an affordable health-care alternative for you and your employees. Establishing a Section 125 Plan (also called cafeteria plans) allow you to use pre-tax dollars to pay out of pocket medical expenses not covered by any other health insurance.

Each year you decide how much money you estimate you’ll spend in healthcare, dental and vision care expenses for the coming year. The plan is funded through pre-tax payroll deductions and then as expenses are incurred you reimburse yourself from the funds in your HFSA. These plans can be started any time, and run on a calendar year basis. However, they are also “use it or lose it” plans, so keep your estimate conservative.

There are 3 elements to a Section 125 plan that can be used together or separately:

  1. Pre-tax health insurance premium deductions, where you can have a portion of your pre-tax salary withheld to pay your medical plan premiums; and
  2. Out-of-pocket medical expenses, also known as flexible spending accounts, where you can use pre-tax dollars (up to a contribution limit of $5,000 per year) to pay for uncovered expenses such as glasses and contacts, co-payments, prescriptions, dentistry and orthodontia, x-rays and bloodwork, and annual deductible amounts; and
  3. Dependent care flexible spending accounts, where you can divert up to $5,000 annually to pay for dependent care expenses like day care for kids under 13, long-term care for elderly parents, and care for disabled spouses or dependents. You can have both a Medical care and a Dependent care account and contribute $5,000 into each account, each year.

Section 125 plans are easy to set up and administer. There is software readily available on the web that you can use yourself, and many existing health care plan providers are happy to set up a Section 125 plan for you at little or not cost.



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