1987-07-27 Regular Meeting - Laserfiche WebLink

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e e ......--- Section 125 "Premium Only Plan" Tax Benefit Flexible benefit plans have been a hotly debated concept throughout most of the 1980's. Many consultants (with an appreciation of the effects of "adverse selection") have come to look with suspicion upon the prospect of employee cholce...partlcularly among medical benefits. Flexible benefit plans, however, do not necessarily require the employer offer of complex and cost inefficient "optional benefit plans". Outlined below, therefore, Is a discussion of a possible "flexible benefit plan" that can offer an employer (and his employees) al I the tax benefits of I.R.C. Section 125, but operated In its simplest form... I.e. the "Premium Only Plan" (POP) approach. Adoption of a POP program permits the employee's current payrol I deductions to be made on a pretax basis. This wll I reduce their federal Income tax and Increase their take-home pay. The employer and employee may also save from reduced FICA, FUTA and Workers' Compensation costs as a result of taking advantage of this IRC provision. Note that no complex, or adverse selection generating, offer of multiple plan options Is required for this to be adopted. Definitions: IRC 125 (g) and the proposed regulations define what a "qual ffled" flexible benefit plan must contain. A summary of these requirements follows: 1. Written Plan - A written legal document, summary plan description, or both must exist before any contribution Is made. Documents must describe and explain: a. all benefits b. el Iglbll Ity rules c. election procedures d. basis for making contributions e. maximum contribution f. the plan year 2. Participants - Participants must be employees or former employees such as retirees. Note that self-employed Individuals (e.g. partners) are not employees and may not participate. An employee Is any person currently el igible under any other qualified health and welfare or retirement plan. 3. Choice - The plan must offer choice between two or more benefits. Within the medical premiums options alone, a POP al lows more than two benefits. A participant must also have a choice between a taxable and a nontaxable benefit. Under a POP, the choice is threefold: the participant may pay the premium after tax (I.e. a taxable benefit), through a salary reduction (I.e. nontaxable benefit), or may elect to pay no premiums, thereby taking home more cash (taxable benefit). IIITn - --- . ;;' IfEAUNS'JWIlInQn..c.