Tax Shelter Plan

The Tax Shelter Plan allows you to pay monthly contributions toward insurance premiums before state, federal and FICA taxes are deducted. By paying your premium with pre-tax dollars, the insurance deduction takes up a smaller percentage of your paycheck than if it were paid after taxes were deducted. The result is more money in your pocket each pay period. The charts below illustrate how the plan works. They are based on a hypothetical example of an employee who receives $3,000 per month with approximately 30% deducted for taxes.

Sometimes you will hear the Tax Shelter Plan referred to as a Section 125 Plan. This refers to the Internal Revenue Service code (Section 125) that allows pre-tax dollars to be applied to insurance premium payments.

Automatic Enrollment

In almost all cases it is to the employee’s financial advantage to tax shelter their insurance premiums (as illustrated in the example above). For this reason we automatically extend this benefit to each employee who elects medical coverage. However, in rare cases where an employee qualifies for the Earned Income Tax Credit (EITC), it may be to that employee’s financial advantage to opt out of the Tax Shelter Plan.

More information about the EITC is available on the IRS web site (www.irs.gov – search for “Earned Income Tax Credit”). Please consult a tax advisor to determine if you qualify for the EITC.

Canceling your Tax Shelter Plan

If you wish to opt out of the Tax Shelter Plan, you must sign a waiver in the presence of a Human Resources employee during a valid enrollment period. Changes are not allowed mid-plan-year, even if your eligibility for the EITC changes or if you realize you made a mistake. Choose wisely!