When a company has both a Section 125 Plan and an Individual Coverage HRA, an employee who pays insurance premiums above the ICHRA reimbursement allowance can take the additional amount above the reimbursement level and receive it as non-taxed income through the employer.
How does an employer facilitate these section 125 plan tax deductions?
Normally the employer, through their payroll services, is expected to administer the Section 125 tax deductions.
To facilitate this in the case of an ICHRA, there are typically two steps:
The employer facilitates the Section 125 deduction through payroll as normal. In our example, the employer’s payroll service (whether in house or through a third party payroll provider) records a $350 Section 125 deduction.
The employer then pays the $350 directly to the employee through their preferred method of expense reimbursement. This can be through payroll or through normal accounts payables. This income is not taxed, but instead is an expense.
Compare this model to that of traditional group health insurance. Employee contributions to group health insurance are deducted through the standard Section 125 reporting. These funds are then applied by the employer to their group health insurance bill to their insurance company. In the case of ICHRA, the employer is no longer paying the insurance company but instead paying the employee, as an expense, the exact amount of their deduction.
The end result provides additional tax savings for the employee and payroll tax savings for the employer.
Companies using Benafica as their HRA service provider will find employee HRA reimbursement amounts and Section 125 deductions amounts on their monthly invoice. Only HRA reimbursement amounts will be paid to employees by Benafica.
Ready to discuss your options? Contact Benafica
At Benafica, it’s our mission to educate companies and individuals on the healthcare benefits available to them, so they can make the coverage decisions that best meet their needs. If you’re ready to learn more about your business’s health benefits options, feel free to give our team a call today at651-287-3253orsend us a message, and we’ll be in touch promptly.