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Background |
Typically, employee
contributions to group
insurance are made with
after tax dollars. The
premiums are deducted
directly from the
employees paycheck.
Section 125 allows the
premiums to be paid with
pretax dollars, thereby
reducing the employees
tax liability and out of
pocket costs.
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Benefits |
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The employees will
benefit from this
section in that there
will be an increase in
the employees’ spendable
income so as to allow
the employers to
increase the employees’
take home pay or allow
employees purchase more
benefits for the same
number of after tax
dollars. Also, employers
will also benefit
because of the reduction
of payroll dollars.
Example:
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Without Section
125
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With Section 125 |
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$5,000 Gross
Income
- 1,400 Federal
Income Taxes
(28%)
- 383 Soc.Sec./Medicare
Taxes (7.65%)
$3,217 Net
Income
- 300 Group Ins
Contribution
$2,917 Spendable
Income |
$5,000 Gross
Income
- 300 Group
Insurance
Contribution
4,700 Taxable
Income
- 1,316 Federal
Inc Tax (28%)
- 360 Soc.Sec./Medicare
Taxes (7.65%)
$3,024 Spendable
Income |
As seen above, there is
a total saving of $107
for this pay period.
Multiplying these
savings on an annual
basis can save the
employee considerable
dollars.
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Social
Security Problems |
Using Section 125
savings now may prove to
be a disadvantage later
at retirement.
Retirement benefits are
based on annual earnings
over the prior 40
quarters. If the taxable
earnings are reduced
now, the employee may
not meet their maximum
social security earnings
later on.
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Effect
On Disability Income Benefits |
Under COBRA, the
employee or the
employee's dependents
have 60 days from the
date of notification to
elect continued
coverage. To elect
continued coverage, the
employee or the
employee's dependents
must submit a properly
completed New Jersey
State
Health Benefits COBRA
Application form. If the
employee or the
employee's dependents do
not
choose continuation
coverage, group health
insurance coverage will
terminate. Conversion to
an individual non-group
private insurance policy
may be offere
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Length
of COBRA Enrollment |
Flexible Spending
Accounts can be set up
to pay for certain
expenses on a pre-tax
basis that can
ordinarily be paid for
only on an after tax
basis. Categories that
can be covered by a
flexible spending
account would include
medical expenses and
dependent care expenses.
Some of these typical
expenses are as follows:
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Deductibles
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Co-insurance
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Routine physicals
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Eye exams
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Eye glasses
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Dentures
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Braces
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Expenses for
alcoholism treatment
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Expenses for mental
illness treatment
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Wheelchairs
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Birth control pills
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Insulin
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Orthopedic shoes
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Dependent care
expenses for
qualified dependents
(children younger
than 13 and/or older
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children or
dependents who are
physically or
mentally unable to
care to themselves).
An employee estimates
the amount of expenses
he/she will incur during
the year. The employee
then divides this figure
by the number of pay
periods in a year and
has that amount deducted
from each paycheck on a
pre-tax basis. These
deductions will
accumulate in the
flexible spending
account. As eligible
expenses are incurred,
the employee pays for
them out of his/her
pocket and then applies
for reimbursement from
the flexible spending
account. These amounts
received are not
taxable.
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Cafeteria
Plans |
According to the law,
COBRA benefits through
the State Health
Benefits Program may be
cut short for any one of
the following reasons:
The employer (or former
employer) no longer
provides New Jersey
State Health Benefits
coverage to any of its
employees. (Your COBRA
benefits should be
continued through the
employer's new insurance
plan.)
The premium for your
continuation of coverage
is not paid.
You become covered under
another group plan as
either an employee or
dependent. An exception
to this rule is if your
new health plan has a
pre-existing condition
clause that is
applicable to you or one
of your enrolled family
members. In that case,
you may continue your
enrollment in COBRA to
pay for the condition
excluded by the
pre-existing condition
clause.
You become entitled to
Medicare
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Cost
and Conversion of COBRA
Continuation Coverage |
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You do not have to
provide proof of
insurability to choose
to continue coverage.
You are, however,
responsible for paying
the cost of continuation
coverage, which is the
full group rate plus a 2
percent administrative
fee.
The COBRA law also
provides that you must
be allowed to enroll in
an individual, non-group
policy of the same
health plan provided
under the State Health
Benefits Program at the
end of your COBRA
enrollment period.
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