What is a Section 125 Plan?
Section 125 health insurance plans, also known as "Cafeteria Plans," are employee benefits programs that take advantage of section 125 of the Internal Revenue Code. These types of plans allow employees to pay for certain qualified expenses (like health insurance premiums) on a pre-tax basis. That is, they're paying with money that isn't taxed. This helps reduce their total taxable income and increases their take-home income. There are two different types of Section 125 plans.
Premium Only Plan
Employers may deduct the employee's portion of the company-sponsored insurance premium directly from said employee's paycheck before taxes are deducted.
Flexible Spending Account
Employees may set aside (on a pre-tax basis) a pre-selected amount of money per plan year. The employee can use their FSA funds to pay for qualified out-of-pocket expenses, medical expenses, or dependent care, but not insurance premiums.
Insurance Plans in Action
Here is an illustration of how a pre-tax benefit works.
Basic Salary Calculation Without Pre-Tax Contributions:
- Gross monthly salary: $3,000
- Monthly health insurance premium: $200 (paid post-tax)
- Taxable income: $3,000
- Taxes at 20%: $600
- After-tax salary: $2,400
- After-tax salary minus insurance premium: $2,200 (final take-home pay)
Salary Calculation With Pre-Tax Contributions:
- Gross monthly salary: $3,000
- Monthly health insurance premium: $200 (paid pre-tax)
- Taxable income: $2,800 ($3,000 minus $200)
- Taxes at 20%: $560
- After-tax Salary: $2,240 (final take-home pay)
By using pre-tax dollars to pay for the health insurance premium, the employee's taxable income is reduced. In the second example, the employee pays $40 less in taxes ($600 - $560) due to the reduced taxable income and that goes into their take-home pay.
When Can I Cancel My Health Insurance at Work?
There are a few reasons why an employee might be wondering, "Can you cancel health insurance at any time?"
- Alternative coverage. If the employee gets new family coverage under a spouse's or domestic partner's health plan.
- Cost concerns. If the employee cannot afford the premiums with their current health insurance plan. This may be risky since medical costs without a health insurance can be substantial.
- Changing to a marketplace coverage. The employee might qualify for subsidies or prefer a plan from the Health Insurance Marketplace.
- Aging into Medicare. When the employee turns 65 or qualifies earlier due to disability, they may opt for health coverage through Medicare.
How Can I Drop My Employer Health Insurance at Any Time?
Can you cancel employer health insurance at any time? We've learned that it depends on a few different factors. Let's say that you can (because it's not a POP or FSA). Now the question remains: how?
The insurance cancellation process through an employer typically involves a few steps, but the exact process can vary depending on the company and the specific insurance plan. Generally, here's how to cancel health insurance through an employer:
- Contact your HR or benefits administrator. Reach out to your company's human resources department or the benefits administrator to find out about the process.
- Review your policy. Check to see if your employer-sponsored health plan only allows changes during the annual open enrollment period. If so, exceptions can be made for a qualifying life event like marriage, birth of a child, or loss of other coverage. This is a "Special Enrollment Period."
- Complete the necessary paperwork. Your HR or benefits administrator will likely provide you with forms or direct you to an online account or portal to request the cancellation.
- Submit and confirm. After submitting your request, follow up to ensure it was received and processed. Verify the date your health insurance plan will end.
- Consider other coverage. If you're canceling your employer-sponsored plan, line up another form of health insurance coverage to avoid potential gaps.
- Stay informed. Some employers might have policies about returning to the plan or penalties for canceling outside of the enrollment period, so make sure you're fully informed before canceling your existing coverage.
If you're looking for the inside scoop on benefits administration and health care, check out more of TriNet's helpful resources. If you're looking for a professional employer organization that can help you with all aspects of benefits and HR administration, consider partnering with TriNet.
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FAQs
When premiums are deducted pre-tax, it means the employee has a Section 125 Plan and cannot change that election until Open Enrollment or a Qualifying Life Event. So, generally speaking, no, an employer cannot force an employee to keep their health benefits or insurance.
Can I ask for money instead of health insurance? ›
Employers commonly ask brokers if they can offer a cash payment to an employee in lieu of paying for that employee's benefits. This option is permitted, and it is referred to as a “cash in lieu of benefits” option (or a “pay in lieu of benefits” option).
Can you decline health insurance for a higher salary? ›
You can and should ask for it. I think the best way to go about it is to be direct. There's no reason why you cannot just point out that you've saved the company thousands of dollars and would like to have a raise.
Can you cancel insurance at any time? ›
Key Takeaways:
Drivers can cancel their insurance policies at any time but should plan for potential penalties or insurance gaps. Many companies provide a prorated refund for policyholders who cancel before the end of their policy term.
What is the law that allows an employee to keep their health insurance under certain circ*mstances after leaving an organization? ›
The Consolidated Omnibus Budget Reconciliation Act (COBRA) gives workers and their families who lose their health benefits the right to choose to continue group health benefits provided by their group health plan for limited periods of time under certain circ*mstances such as voluntary or involuntary job loss, ...
Which employer benefit option requires the employee to refuse to participate in the plan? ›
A health insurance opt-out arrangement is a financial incentive some employers offer employees to decline group health coverage. Such arrangements are used by employers to reduce benefit costs by paying less for the incentive than they would for their share of the benefit premium.
Can I negotiate salary if I don't need health insurance? ›
After receiving an offer, don't be afraid to negotiate a higher starting salary in light of the lack of benefits, Patrick says. “It doesn't hurt to ask, and the worst they can do is tell you no,” she says. This can be key as you contemplate: Should I take a job with no benefits?
How much of your salary should go to health insurance? ›
A good rule of thumb for how much you spend on health insurance is 10% of your annual income. However, there are many factors to consider when deciding how much to spend on health insurance, including your income, age, health status, and eligibility restrictions.
Can I offer benefits to some employees and not others? ›
California requires employers to offer all eligible employees certain employee benefits and accommodations.
Can you negotiate insurance with an employer? ›
While employers often offer insurance plans (health, dental, life, vision, etc.) and 401(k)s, it can be difficult to negotiate these items because the companies already have set terms. Once you understand the employer's package options, examples of benefits you can potentially negotiate include: Stock options.
Cancellation fees: Some car insurance companies charge cancellation fees, usually $50. In other cases, they could charge you a small percentage of your final premium that you were going to pay in the future. The majority of the time, you will not have to pay a cancellation fee.
What happens if you cancel insurance early? ›
Generally, insurers will refund you the money for the unused portion of your policy, assuming you paid in advance. However, depending on your state, and when you cancel, your insurer may charge a cancellation fee.
How easy is it to cancel insurance? ›
Most major companies simply ask that policyholders speak with an insurance agent to cancel. The phone number likely will be found on your insurance card, as well as on the company's website or app.
Which act gives an employee who is leaving a job the right to continue health coverage under the employer's plan abbreviated? ›
The Consolidated Omnibus Budget Reconciliation Act (COBRA) health benefit provisions amend the Employee Retirement Income Security Act, the Internal Revenue Code and the Public Health Service Act to require group health plans to provide a temporary continuation of group health coverage that otherwise might be ...
Can you get laid off while on FMLA? ›
In practice, yes, it can happen. Whether or not it is legal is another matter entirely.
Can an employer recover their portion of health benefit premiums when an employee fails to return from FMLA? ›
The employer may recover its share of health plan premiums if the employee fails to return to work after his or her unpaid FMLA leave entitlement has been exhausted or expires, unless the reason the employee does not return is due to: Circ*mstances beyond the employee's control; or.
Can you ask for a higher salary instead of benefits? ›
If the benefits and pay do not align with your skills, qualifications, career level or education, you can negotiate for more money or better benefits. It is also acceptable to suggest other forms of compensation, such as stock options or extra vacation days.
Can I pay out of pocket instead of using insurance? ›
You may choose not to use insurance if the service you need isn't covered, or it's less expensive if you pay out of pocket. In most cases, providers and facilities must give you an estimate when you schedule care at least 3 business days in advance, or if you ask for one.
How common is cash in lieu of benefits? ›
A common practice for many public entities is to offer employees an opt-out payment for declining an offer of health insurance coverage. These payments are commonly referred to as a “Cash In Lieu” option.
Should you ever go without health insurance? ›
It's generally never a good idea to skip health insurance coverage due the financial risk of ending up with whopping medical bills.
