Is a payroll tax savings benefits plan legitimate?
Some are and some are not. Plans built on Section 125 and Section 105 of the tax code can be legitimate when reimbursements are tied to real medical expenses and the plan is properly documented and administered. The design details matter more than the sales pitch.
Why employers are skeptical
If you have been pitched a program that adds health benefits for employees and lowers your payroll taxes at the same time, caution is the right reaction. The idea is not new. Employers have used pre-tax benefit plans for decades. What varies is how each program is built, and that is where the risk sits.
Seven things to check before you sign
- Who administers the plan. Ask for the name of the third-party administrator, how long they have operated and how many employers they serve.
- The plan documents. You should receive a written plan document and summary plan description, not just a brochure.
- How reimbursements work. Ask whether payments to employees are tied to substantiated medical expenses or paid as a flat amount. This is the single most important question.
- The legal basis in writing. A reputable administrator can provide a written legal opinion or memorandum explaining the tax treatment.
- Compliance responsibilities. Ask who handles nondiscrimination testing, ERISA, ACA and HIPAA obligations.
- What happens in an audit. Ask who responds, who pays for the response, and what indemnification, if any, is in the contract.
- The promises being made. Be wary of words like "guaranteed", "IRS approved" or "zero risk". The IRS does not pre-approve these programs.
Bring your CPA in early
Hand the plan documents and legal memorandum to your CPA or benefits attorney before you commit. A program worth adopting will hold up to their questions, and an administrator worth working with will welcome them.
How we approach it
Everlasting Benefits Group introduces employers to third-party administrators. We do not ask anyone to decide on a phone call. You get the plan documents and written numbers first, and we encourage you to have your own advisor review them.
Common questions
Does the IRS approve payroll tax savings benefit plans?
No. The IRS does not pre-approve these programs. Tax treatment depends on how the specific plan is designed and operated, which is why independent review matters.
What is the biggest red flag?
Promises such as guaranteed savings, IRS approval or zero risk, and a seller who will not put the plan documents and tax basis in writing.
Should my CPA review the plan?
Yes. Ask for the plan documents and the written legal basis, and have your CPA or benefits attorney review them before you sign.
See if your company is a fit
Book a free 15-minute call with a founder. You get written numbers and the plan documents before you decide anything.
Book a free callThis article is general information, not tax, legal, accounting, insurance or benefits advice. Everlasting Benefits Group is an independent sales representative for third-party plan administrators and may be paid by them when an employer adopts a plan. We are not a plan administrator, insurer, law firm or accounting firm. Tax rules change and results vary by state, payroll and plan design. Talk with your own CPA or attorney before adopting any plan.