Employers will be able to provide employees their much-needed benefits which would have been otherwise unaffordable with a Section 125 Cafeteria Plan. The benefits offered under such a plan are deducted pre-tax so the cost of the premiums are significantly less than what these employees would be paying out had they availed of insurance coverage using after-tax income.
One of the benefits that can be offered through a cafeteria plan is disability benefits. So, if the employee is hurt or becomes ill, and is unable to work, he or she can collect on the plan and have funds available for living expenses.
But one thing that the employee needs to be aware of is that disability coverage paid for under a Cafeteria Plan can reduces the benefits he gets. The reason for this is that the premiums were paid by the employee pre-tax so the amount that went into paying for the disability insurance were not taxed at all. So, if benefits are paid, the IRS wants its revenue on the back end, and those disability benefits become taxable to the employee. With a considerable portion of your benefits taken out for taxes, this would leave a paltry amount for support during your recovery period.
But had you secured a disability insurance policy out of your own pocket, or even acquired one through your employer but with the contribution made using after-tax income, the benefits paid out to you would have been absolutely free of tax.
So, how does the taxation work?If you as the employee receives the benefit amount directly from the insurer, the amount given to you could already be net of withholding and FICA taxes, plus Medicare. The amount of the benefit payments will then be added to your taxable wages on your Form W-2, or you might receive a separate Form W-2 just for the insurance benefits. If it’s an option to have taxes taken out of the payments as they occur, you should probably do it ? you don’t want to have to shell out the full amount of the taxes next April 15. Sometimes the employee gets benefits and doesn’t realize they’re taxable until the W-2 or 1099 arrives the next January?and then, it’s too late.
Of course, the benefits won’t be taxed at 100%, and it’s certainly better to have taxable disability benefits than to have no safety net at all should you become hurt. The important thing is you still have some amount to tide you over.
If getting disability insurance through a cafeteria plan is the only affordable option open to you for the time being, then just do it. But should finances permit, it’s most advisable to avail of a disability policy outside of a Section 125 Cafeteria plan.
Yet while it’s all good to be prepared, the best thing would be if you won’t ever have to use your disability policy. But in any case tax advantages aren’t the only consideration, when an employer or employee considers what items they include in their Section 125 Plan they should take council from a professional.
Give us a visit at http://taxfreepremiums.com to know more about the benefits you can avail and the resulting tax savings a Section 125 Plan offers. You can also learn more about our automatic document solution that can give timely and cost-effective updates to your Section 125 POP plan document.
Tags: health, health insurance, Insurance, irs section 125, section 125, section 125 benefits, section 125 disability benefits, section 125 plan, section 125 plan document, section 125 pop plan