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105 and 125 plans, together?

Guest Jkyger

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Someone is telling me that a small business can have 105 and 125 plans in place that the same time. Can anyone say for sure (citing the source) if this is true or not? The company has employees other than the owner and spouse.

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When an employer pays the premium for a health plan the value of the benefits received by the employees is excludible from the employee's gross income as per 105(B). It has nothing to do with 125.

If an employee pre-taxes, through a salary reduction agreement, their portion of premium or any additional premium for an eligible plan, that is usually done under 125 so that the amount can be treated as employer premium to meet the requirements of 104, 105 and 106.

If the employee has a choice between cash and a qualified benefit, 125 serves to provide relief from the constructive receipt rules of 451 and allows the elected amount to be treated as an employer contribution.

125 does nothing but provide relief from constructive relief Prop. Treas. Regs. 1.125-1 Q&A 6, 9 and 15, 1.125-2 Q&A 2, whereas, 105 provides the tax free nature of the benefits received, 1.125-1 Q&A 11, 16 and 17, 1.125-2 Q&A 4(a)1 and (2), Q&A 7, .

In general you cant have a 125 plan without a 105 plan.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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