Beware of Payroll Company Profit Centers and Save Money

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One area that just about every client of a payroll processor is paying too much for is Section 125 Premium Only Plan (POP) administration. A recent survey found that payroll processors are charging their clients $360.00 to $1,500.00 every year for Section 125 POP administration. Discover a $99 alternative.

– Payroll processing has become an extremely competitive business; many payroll companies have come up with creative ways to overcharge unsuspecting clients for questionable services in order to pump up their bottom line. Are you paying too much for payroll processing? It depends on who’s processing your payroll, how many services you’ve requested, and how many reports they provide.

One area that just about every client of a payroll processor is paying too much for is Section 125 Premium Only Plan (POP) administration. Section 125 is the part of the Internal Revenue Code that allows employees to pre-tax, or avoid paying taxes, on their portion of employer sponsored insurance premiums. Most employers pay for all or most of the employee’s portion of health insurance, however, the employee normally pays for part of their own premium, and the full cost for their dependent coverage. The Section 125 POP saves the employee approximately 30% in income and FICA taxes on this portion of the cost, and saves the employer approximately 7.65% in matching FICA taxes. Clients may also want to verify that the payroll processor is actually applying the employer’s 7.65% FICA discount; otherwise this could be another large windfall profit center for the payroll processor instead of the client. This becomes a much bigger issue as the cost of health insurance continues to double every four years.

A recent survey found that payroll processors are charging their clients between $30.00 and $50.00 per month for Section 125 POP administration, and some payroll processors charge an additional $5.00 to $10.00 per month per employee, over and above the monthly fee. This averages between $360.00 and $1,500.00 annually, year after year. Clients are usually shown that their FICA tax savings more than offset these high fees, (if they’re actually receiving it). This effectively moves those savings out of the clients pocket and into theirs. Skip to the end of the article for a low cost solution to these charges.

One well known payroll processor routinely use IRS audit horror stories about large fines to scare clients who question the high fees. Many more payroll processors routinely, and falsely, tell their clients the high fees also include filing the annual IRS Form 5500, a requirement that was suspended by the IRS for Section 125 plans in 2002. These companies also imply that this is much too difficult for the client to administer themselves, while they routinely assign the task to their lowest paid employees. This is evidenced by the volume of uneducated remarks these employees consistently make.

What does the payroll processor actually do for those monthly fees? In reality they’re doing very little, almost nothing compared to the cost. This is what they don’t want you to know.

Here’s what is required to take advantage of the tax savings under a Section 125 Premium Only Plan:

  • The IRS requires that the sponsoring company maintain a formal Plan Document
  • Every employee must sign an election form 30 days prior to the new Plan Year
  • Every employee should receive a copy of a Summary Plan Description or SPD
  • Once a year the group should perform nondiscrimination testing to ensure the plan is not discriminating in favor of highly compensated or key employees
  • Only employees are allowed to participate in Section 125 plans

Back to the question; what is the payroll processor actually doing for the fees they charge? They’re providing the Plan Document and the SPD, and they may be providing the annual nondiscrimination testing. Everything else is done by the client. The client collects and forwards the employee election forms to the payroll processor who enters the deductions into their program as a pre-tax deduction instead of a post-tax deduction. The employee deductions are left in the client bank account and the client pays the insurance premium to the carrier themselves.

Your next question should be; what is this Section 125 POP service really worth? Core Documents, Inc., a nationwide leader in providing low cost IRS and DOL compliant Plan Documents for Section 125 Plans, only charges $99.00 plus $15.00 shipping and handling. Employers receive a complete kit in a personalized notebook that includes: a Corporate Resolution to establish the Plan; a formal Plan Document; a Summary Plan Description (SPD); election forms; and an extensive administrative guide complete with fill-in-the-blank nondiscrimination forms, and everything needed to successfully establish and operate a Section 125 POP. Core Documents is also available to answer questions and will maintain the document for changes in the tax code and law for only $69.00 a year.    

Do you have to use the payroll processor’s Section 125 POP services? Absolutely not, you simply tell them you no longer need the Section 125 service, you’ll be doing it yourself. Although they won’t be happy about it, they still have to make the deductions on a pre-tax basis, which is a simple function of their payroll software. Once you have your own Plan Document you don’t need their Section 125 POP service any longer. As long as you’re using their documents you must pay them. This is the reason most payroll processors don’t give you a copy of your Plan Document, and many clients, who don’t know any better, never receive a copy of the Plan Document even after they stop using the payroll processor. This can create problems later in the event of an IRS audit. Good luck trying to get a copy later. It’s not wise to allow an outside entity to hold your critical IRS and DOL required Plan Documents hostage for an unreasonable annual profit.

Visit Core Documents at and order your own Section 125 POP kit for only $99 + S&H and start saving money immediately. Tell your payroll processor you no longer need their Section 125 service as you’ll be doing it yourself.


Gene Ennis


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Gene Ennis, CFC
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