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  Bridging the Employer-Employee Gap (sm)
 

Flex 125 

 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.
 

 Benefits

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:

Without Section 125 

With Section 125

$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.
 

 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.
 

 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
 

 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:
  • Deductibles
  • Co-insurance
  • Routine physicals
  • Eye exams
  • Eye glasses
  • Dentures
  • Braces
  • Expenses for alcoholism treatment
  • Expenses for mental illness treatment
  • Wheelchairs
  • Birth control pills
  • Insulin
  • Orthopedic shoes
  • Dependent care expenses for qualified dependents (children younger than 13 and/or older
  • 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.
 

 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
 

 Cost and Conversion of COBRA Continuation Coverage

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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