How Section 125 Plans Can Help You Make More Money

Pre-tax benefit deductions are one of the most potent but underused tools in the employer benefits toolset for making employees happier and making payroll work better. One of the most useful tools is the Section 125 plan, which is also called a “cafeteria plan.” A Section 125 plan isn’t only about giving workers health benefits; it’s also about putting real money back into their paychecks and lowering the amount of payroll taxes that employers have to pay.

In this blog, we’ll talk about how Section 125 pre-tax deductions operate, why the IRS approves them, and how a plan like the Lumara Plan may help workers take home more money without costing employers anything more.

What Are Deductions for Benefits Before Taxes?

Before taxes are computed, pre-tax benefit deductions are monies taken out of an employee’s gross pay. This implies that workers pay taxes on a lesser part of their income, which lowers their tax bill and, in the end, gives them more money in their paycheck.

These deductions usually relate to advantages like:

• Premiums for health insurance
• Coverage for eye and dental care
• FSAs, or flexible spending accounts
• Health savings accounts (HSAs)
• Help in caring for dependents

Section 125 of the Internal Revenue Code, which outlines the rules for employer-sponsored pre-tax benefit schemes, lets people take certain deductions.

What You Need to Know About Section 125 Pre-Tax Deductions

A Section 125 plan lets workers turn taxable income into benefits that aren’t taxed. Both employers and workers gain from this:

• Employees pay less in federal income taxes, Social Security (FICA), and Medicare because they lower their taxable income.
• For every dollar an employee puts into qualifying pre-tax benefits, their employer doesn’t have to pay as much in FICA and FUTA payroll taxes.

These tax breaks might be quite big. If an employee puts $3,000 a year into pre-tax benefits, they might save more than $600 on their taxes, depending on their tax rate. When you multiply it by the number of people that work there, you can see the effect.

Section 125 Plans: How to Get More Money in Your Paycheck

A raise or bonus would probably be needed for a lot of workers to get more money in their pockets. But that’s not always the case. Employees may increase their take-home pay by lowering the amount of income that is taxed if they have a Section 125 plan.

For example, an employee makes $50,000 a year and pays $3,000 a year for health insurance. They have to pay income and payroll taxes on the whole $50,000 if they don’t have a Section 125 plan. They only have to pay taxes on $47,000 thanks to Section 125 pre-tax deductions.

That $3,000 isn’t susceptible to:

• Tax on income from the federal government
• FICA is 6.2% for Social Security and 1.45% for Medicare
• State income tax (in most states)

That means workers get more money in their pockets without the firm needing to raise gross salaries. And the company saves money on payroll taxes, which is good for both sides.

What the Lumara Plan Does

A lot of companies are afraid to use Section 125 plans because they think they will be hard to manage, follow the rules, and keep the plan paperwork in order. The Lumara Plan alters everything.

By integrating the following, the Lumara Plan makes the Section 125 model easier to understand and better:

• A Section 125 structure that the IRS says is okay
• A Pre-Tax Concierge Medical Plan (PCMP) that lets workers get virtual care and lab services around the clock
• A Self-Insured Medical Reimbursement Plan (SIMRP) lets you get back tax-free money for eligible medical expenditures that you paid for with pre-tax money

This all-in-one solution not only gives workers pre-tax benefit deductions, but it also keeps companies in compliance and gives employees actual healthcare value.

Why Employers Should Care About Employees’ Pay

Employees care about their wage, but they really care about how much money they get in their bank account. A Section 125 plan, particularly one powered by Lumara, is helpful for companies in the following ways:

• Offer perks that are competitive and free
• Increase perceived pay to keep employees longer
• Show workers that they are valuable without rising payroll expenditures
• Lower their own tax bills

Not only are employees receiving more money, but they’re also getting more useful perks, including access to healthcare treatments that would be too expensive or hard to acquire otherwise.

How Section 125 Plans Work to Stay Legal

Section 125 plans must follow IRS rules. That includes:

• Plan papers in writing
• Testing for nondiscrimination
• Opportunities to sign up every year
• Clearly defined advantages that are available

The employer doesn’t have to worry about any of this since the Lumara Plan does it all. No extra work for the office, no complex paperwork, and no extra expense. Compliance is built in, so companies don’t have to worry about IRS requirements and can concentrate on developing their company.

Real Money, Real Impact

Let’s think about a company that has 50 workers. The corporation might save thousands of dollars a year in payroll taxes alone by using the Lumara Plan to set up Section 125 pre-tax deductions. At the same time, each worker may take home hundreds of dollars more without ever asking for a raise.

These statistics aren’t just guesses; they’re what firms who use Lumara right now have seen happen:

• Employers save more than $500 per year for each employee that takes part
• Employees save hundreds of dollars on taxes and have access to extra healthcare services
• Retention goes up when workers sense that their company cares about their health and well-being

Why You Should Act Now

It is tougher than ever for companies to match their budgets with the requirements of their employees because of inflation, growing healthcare expenses, and a competitive job market. Section 125 pre-tax deductions are a legal, practical, and proven approach to fill that deficit.

The IRS already allows these kinds of savings. The Lumara Plan makes it simple to get them.

There is no expense to you, your current health insurance won’t be affected, and you won’t have to do anything to set it up. So there’s no reason not to start raising your take-home income via Section 125.

Last Thoughts

Section 125 plans are not simply ways to save on taxes; they are also ways to retain employees, raise wages, and make payroll more efficient. Employers may remain legal and competitive while making every paycheck worth more by giving pre-tax benefit deductions.

The Lumara Plan lets companies achieve all of this without any added expense, complicated administration, or danger.

Are you ready to help your team retain more of the money they worked hard for? With the Lumara Plan, you may start using pre-tax benefit deductions right now. Learn more about the Lumara Plan →