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Key takeaways:
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- With Section 125 plans, employees can save by paying for benefits with their pre-tax dollars.
- For employers, this means higher employee satisfaction and lower payroll taxes.
- If you’re a broker, you should consider adding these plans to your portfolio so you have a product for customers who prioritize value.
What drives employers to pick one plan over another? Value is often the answer.
Decision makers have a budget and want to make sure they get as much out of it as possible. They see benefits as an investment and want a return they can measure.
As a broker, you can connect with these value-conscious clients by presenting Section 125 benefits, also known as cafeteria plans, a product that uses pre-tax contributions.
What Are Section 125 Pre-Tax Deductions?
Section 125 plans allow employees to pay for benefits with their pre-tax dollars. FSAs and HSAs are common examples, with many employers offering these benefits through pre-tax payroll deductions. Group health insurance and prepaid vision benefits like VCD plans are other examples.
These pre-tax deductions are convenient since they come right out of an employee’s paycheck. They also lower the cost of the benefits offered.
For instance, an employee making $1,500 in a pay period would pay around $280 between their federal income, Medicare and Social Security taxes. This lowers their take-home pay down to around $1,220. If this employee is paying for a health, vision or dental plan with a $70 premium with their after-tax earnings, they end up with $1,150 left in their pocket.
This same employee spending $70 on a plan with their pre-tax dollars has their $1,500 income lowered to $1,430 before taxes. This means they’re paying around $260 in taxes and end up with $1,170, and a plan they already paid for.
For brokers who need to put value forward, Section 125 plans are a powerful argument:
- These products can shift deductions to the employees, helping employers reduce what they spend on their benefits packages.
- Section 125 pre-tax deductions keep benefits affordable for employees with payroll deductions before taxes.
Let’s take a closer look at the benefits of Section 125 plans.
How Do Section 125 Benefits Help Employers and Employees Save Money?
Paying for benefits with pre-tax money reduces how much employees spend on these plans, but there are also benefits for employers.
From an employee’s perspective, paying for benefits with pre-tax dollars essentially means spending less on these perks. In the example mentioned above, the $70 plan costs $20 less per pay period as a Section 125 product. If it’s a bi-weekly deduction, the employee is saving over $500 a year.
A lower taxable income means the net pay goes up. This tangible difference helps with employee satisfaction, which employers are looking at more closely when choosing benefits.
You can also connect employee satisfaction to retention. Cafeteria plans cost less and have a good perceived value among employees, which makes them more likely to enroll and view these benefits positively. Every employer knows that people who are happy with their benefits are more likely to stay.
On the employer’s side, the income used to calculate payroll taxes, including Medicare, Social Security, and unemployment tax, is lower after the cafeteria plan deduction. This translates into consistent savings on payroll taxes.
Plus, Section 125 benefits are a flexible choice. Vision Care Direct of Oklahoma State Director James Ashford explains: “Spending less on payroll taxes isn’t the only benefit for employers. Section 125 plans allow employers to pay for all or part of the benefits offered via a non-elective contribution. It’s a great way to reward employees and increase satisfaction without trapping businesses into a rigid system.”
Prepaid Vision Plans Have Other Benefits
When talking about value with customers, bringing up the tax benefits of Section 125 vision plans is a great argument. You can go further by talking about the additional perks of prepaid vision benefits.
Prepaid vision plans help employees save more compared to traditional eye health insurance. Instead of using a structure based on reimbursements, prepaid plans come with negotiated savings. Typically, the amount employees can save is higher than what an insurer would reimburse, and they can easily save $200 to $300 between getting an eye exam and a new pair of glasses. Getting immediate savings at the time of service is also a lot more convenient compared to the traditional reimbursement process.
Plus, prepaid products are flexible with different savings tiers and come with transparent pricing. If employees know exactly how much they’ll save, they’re more likely to get their eyes checked often. Optometrists can catch eye problems early and address them before productivity drops, and they can also spot early symptoms of a wide range of health conditions, ranging from diabetes to heart problems. For employees and employers, early detection means better health outcomes and lower health costs.
Offer Great Pre-Tax Vision Plans With VCD
Healthcare costs are up, and employers are looking to stretch their benefits budgets as much as possible. Section 125 products are a great answer to this challenge.
With Vision Care Direct of Oklahoma, you can offer prepaid vision plans with pre-tax deductions and great savings at one of the largest networks of optometrists in the state.
As a doctor-owned organization, we believe in offering a transparent pricing structure and the best customer service. Find out more about joining the VCD family as a broker and earning a 10% commission on our plans.
FAQ
What is a Section 125 plan, and how does it work?
A Section 125 or cafeteria plan allows employees to enroll in benefits and pay for them with pre-tax dollars. This reduces their taxable income.
What types of benefits can be paid for with pre-tax dollars?
HSAs and FSAs are popular options, but you’ll also find group health insurance plans with pre-tax dollar deductions, as well as vision plans.
Do employers also save money with Section 125 plans?
Employers save money when offering Section 125 plans since pre-tax payroll deductions from employees lower the income subject to payroll taxes.
