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125 Cafeteria Plan, Yes Or No

Discuss Labor Laws

125 Cafeteria Plan, Yes Or No

Postby Burch » Thu Nov 17, 2016 1:53 am

Hello Tony,

For a small c corp with two shareholder/employees must I have a 125 Cafeteria Plan if I want to offer the following fringe benefits:

SEP-IRA w/employer contributions

401K w/salary deferral & employer contributions

100% premium paid health care

HSA w/high ded. health and employer(only) contributions

paid sick leave

paid vacation

I am assuming everything goes through payroll and federal taxes except the employer contributions. Is it all deductible to the corp?

Also, does all this change if I add one hourly employee who would get exactly the same benefits and contributions that we get?

Thanks,

FionaElysien Private Wealth  

ANSWER: Hi Fiona:

You do not need a section 125 plan to offer the other benefits you are mentioning. But you can offer a section 125 plan as a c-corp and maintain tax deductions as the owner / shareholder of the corp. This option would not be available to you as an s-corp. owner with controlling interest in more than 2% of the company.

What the section 125 plan will allow is tax deductions by both the corporation and the employee contributions to the HSA plan. If you did not have the section 125 plan in place, the HSA plan would be deductible by the corporation, but not by the individual employees. The other benefits you are discussing are good options, but I would not recommend doing both a SEP and a 401k plan. I would just go with a safe harbor 401k plan option. This will allow the owner to contribute the maximum amount allowed by law and keep the profit sharing component as an option based upon company revenue. I feel when you have employees this is always a better option than a SEP, especially if you are considering adding employees.

Also, hourly employees would be allowed to participate based upon the plan documents you establish, but yes if the are W-2 employees, they would be eligible for participation in all benefits plans. Furthermore, all eligible employees are required under ERISA(Employee Retirement Income Security Act)to be included in these benefit plans as to not run afoul of employment discrimination laws. If the hourly employees are independent contractors, they would not be eligible to participate in these programs.

You are correct regarding payroll tax, it is deductible to the corp, except for employee contributions. Also, it can all be run through payroll.

I hope this helps and let me know if you need anything else or I can be of further assistance.

Regards.

Tony DePasquale

President

Elysien Private Wealth ---------- FOLLOW-UP ----------

HI Tony,

Thank you for a quick and thorough reply. A few more questions, if I may.

Assuming if there is an employee, they get whatever we get..

1) Without the 125 Plan, does the employer contribution to an HSA count as income to employee if it is paid directly to HSA?

2) Does the employee salary deferral portion of a 401K or SEP go through payroll, soc. sec., etc., but not income to employee? Is that possible? And is the salary that is deferred deductible to the corp?

3) Does any of this become non-deductible to the Corp. without a 125Plan?

I realize that without a 125Plan we probably pay more in payroll taxes, but it feels like the 125 Plan adds a complicated, and somewhat expensive, layer to the fringe benefits.

Thanks again,

Fiona
Burch
 
Posts: 51
Joined: Sun Jan 19, 2014 7:35 am

125 Cafeteria Plan, Yes Or No

Postby Risley » Fri Nov 18, 2016 9:52 am

Elysien Private Wealth  

Fiona:

1)No, the employer contribution is considered an employee benefit and is not considered income to the employee, that is why it is tax deductible by the corporation. However, you can consider the contribution as part of the employee's overall compensation package as the owner of the corp. The employee would not have to pay normal income taxes on that benefit. Also, the employee would not be able to deduct the employers contribution to their HSA on their personal income taxes, only their own contributions would be personally deductible.

2) Employee salary deferrals for a 401k plan can be done through payroll. This is employee income and is tax deductible directly to the employee. The employee aspect of a contribution is not deductible by the corporation. Contributions by the employer(i.e through profit sharing or safe harbor matching) is deductible by the corporation for the year given. The employee would have to pay normal income taxes on all contributions when they withdraw funds from the account. Unless of course you establish a Roth 401k.

3) The matching and profit sharing components of a 401k are always tax deductible to the corporation. The health insurance premiums paid by the corp are tax deductible to the corp. The set up fees for the 401k plan can receive a $500 tax credit per year for the next three years for any out of pocket expenses for set up. The HSA contributions by the corp are tax deductible to the corp. All of these deductions are with or without the section 125 plan. Without the section 125 plan, the employee contributions to the HSA would not be tax deductible.

Depending on who you do payroll through, the process should not be very cumbersome. For example if you do a section 125 plan and have three participating employees, the plan doc and administration aspects of a section 125 plan is free through Aflac. The employees can choose from a variety of benefits to accommodate their unique needs. All they need to do is pay the monthly premiums. If this is not an option, setting up a POP 125 plan should only be a couple of hundred dollars through a good third party administrator. Ongoing admin should be minimal as well. It is my pleasure to help you with your questions. If you require any other assistance, please let me know.

Regards,

Tony DePasquale

President

Elysien Private Wealth
Risley
 
Posts: 45
Joined: Mon Jan 06, 2014 10:36 am

125 Cafeteria Plan, Yes Or No

Postby Voisttitoevetz » Sat Nov 19, 2016 3:26 am

Hello Tony,

For a small c corp with two shareholder/employees must I have a 125 Cafeteria Plan if I want to offer the following fringe benefits:

SEP-IRA w/employer contributions

401K w/salary deferral & employer contributions

100% premium paid health care

HSA w/high ded. health and employer(only) contributions

paid sick leave

paid vacation

I am assuming everything goes through payroll and federal taxes except the employer contributions. Is it all deductible to the corp?

Also, does all this change if I add one hourly employee who would get exactly the same benefits and contributions that we get?

Thanks,

FionaElysien Private Wealth  

ANSWER: Hi Fiona:

You do not need a section 125 plan to offer the other benefits you are mentioning. But you can offer a section 125 plan as a c-corp and maintain tax deductions as the owner / shareholder of the corp. This option would not be available to you as an s-corp. owner with controlling interest in more than 2% of the company.

What the section 125 plan will allow is tax deductions by both the corporation and the employee contributions to the HSA plan. If you did not have the section 125 plan in place, the HSA plan would be deductible by the corporation, but not by the individual employees. The other benefits you are discussing are good options, but I would not recommend doing both a SEP and a 401k plan. I would just go with a safe harbor 401k plan option. This will allow the owner to contribute the maximum amount allowed by law and keep the profit sharing component as an option based upon company revenue. I feel when you have employees this is always a better option than a SEP, especially if you are considering adding employees.

Also, hourly employees would be allowed to participate based upon the plan documents you establish, but yes if the are W-2 employees, they would be eligible for participation in all benefits plans. Furthermore, all eligible employees are required under ERISA(Employee Retirement Income Security Act)to be included in these benefit plans as to not run afoul of employment discrimination laws. If the hourly employees are independent contractors, they would not be eligible to participate in these programs.

You are correct regarding payroll tax, it is deductible to the corp, except for employee contributions. Also, it can all be run through payroll.

I hope this helps and let me know if you need anything else or I can be of further assistance.

Regards.

Tony DePasquale

President

Elysien Private Wealth ---------- FOLLOW-UP ----------

HI Tony,

Thank you for a quick and thorough reply. A few more questions, if I may.

Assuming if there is an employee, they get whatever we get..

1) Without the 125 Plan, does the employer contribution to an HSA count as income to employee if it is paid directly to HSA?

2) Does the employee salary deferral portion of a 401K or SEP go through payroll, soc. sec., etc., but not income to employee? Is that possible? And is the salary that is deferred deductible to the corp?

3) Does any of this become non-deductible to the Corp. without a 125Plan?

I realize that without a 125Plan we probably pay more in payroll taxes, but it feels like the 125 Plan adds a complicated, and somewhat expensive, layer to the fringe benefits.

Thanks again,

Fiona
Voisttitoevetz
 
Posts: 33
Joined: Thu Mar 06, 2014 11:06 am


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