How Much Do Employee Benefits Cost Your Business?
When reviewing your benefits proposal, it is important to understand that the quoted amount represents the total bill.
This figure does not factor in employee contributions, which are deducted from payroll.
In addition, there are significant tax advantages to consider. Employer contributions can be written off as a usual business expense, providing fiscal benefits.
If your business is pre-taxing benefits, you are exempt from matching the associated payroll taxes on the employee contributions.
Equally important, employees are not subject to payroll taxes on their contributions for themselves and their dependents.
Important Compliance Note: Your business must have the appropriate Section 125 plan documents in place if you are pre-taxing your benefits.
Failure to have these documents while pre-taxing benefits is a non-compliance issue. The penalties for pre-taxing employee benefits without the required Section 125 plan documents are as follows:
Tax Consequences: All elections employees make under the "pretend" Section 125 plan would be taxable. This means employees could owe income and FICA taxes on any amounts they've set aside or received under the plan. Likewise, employers would owe FICA and FUTA payroll taxes on those amounts.
Penalties: The IRS could levy penalties on the employer for not withholding the correct amount of income and payroll taxes, as well as for not reporting those amounts correctly on W-2 forms.
Interest: On top of penalties, interest would accrue on the unpaid tax amounts.
Plan Disqualification: The IRS could disqualify the entire cafeteria plan, which means all employee elections would become taxable.
Additional Scrutiny: Mistakes related to Section 125 can draw further IRS scrutiny, which can lead to broader audits of an employer's tax practices.
Potential Litigation: Employees might also sue the employer for the additional taxes they owe because of the employer's failure to maintain a proper plan document or operate the plan in compliance with the rules.
If you believe your company might have issues with Section 125 plan compliance, you should immediately consult with a tax attorney, CPA, or benefits consultant. They can guide you through the potential ramifications and any possible remedial measures.
Copyright: The General Agency - 2023