Broker Check

Increase Profit Margins and Employee Retention by Utilizing a PTRP

| June 10, 2021

If I told you there is a way that to reduce the amount of FICA and payroll taxes your business pays, increasing profit margins on the organization’s payroll expense, increase employee benefits, and doing so would have no effect on any employees’ net pay; you might say I’m crazy. Well, my sanity may still be questionable, but the above statement is true.

A Payroll Tax Reduction Plan (PTRP) is just taking full advantage of the tax code, particularly IRC Section 125. While most employers with W2ed employees are offering some type of insurance benefits, less than 1 percent of the businesses we come across structure their benefits package in a way that takes full advantage of the tax code. This is likely due to many of the “cookie cutter” benefits packages that are offered to employers which normally don’t utilize ancillary benefits such as a gap insurance plan.

When ancillary insurance benefits like gap insurance are utilized, it creates a unique payroll model that can provide tax credits to employees. When additional benefits are funded this way, you are literally using benefits to fund benefits.

The high-level highlights of this structure are below:

Benefits of the plan:

-On average employer’s reduce their payroll tax burden by over 15%
-Employee retention is increased by 59%
-Employees receive tax credits to fund additional benefits
-On average employee benefits quadruple and their net pay DOES NOT change
-Out of pocket medical costs for employees are greatly reduced or eliminated

Employer Eligibility Requirements:

-25 or more full time W2 employees making at least $25,000 a year.
-Employer must currently offer a healthcare plan

Employee Eligibility Requirements:

-Must currently have healthcare (it does not have to be with the employer, it can be through a spouse, parent the exchange ect)
-Must be full-time with the employer
-Must be a W2 Employee
-Must be 18 years or older
-Must have an annual income of $25,000 or more with the same employer

To obtain these benefits employers are required to offer additional benefits, however, these benefits can be offered with no out of pocket costs to the employer or the employee. Like most the other benefits offered by employers, this is a voluntary program, and employees will be required to enroll in the new benefit offering, such as a gap insurance plan. When employees enroll, they will receive tax credits, which they are required to use on additional benefits. Those tax credits cannot be taken as cash.

As you likely have already put together, the most common type of ancillary benefit is gap insurance. Generally, gap insurance covers out of pocket costs that are not covered by a major medical plan, such as deductibles and out of network costs, but can still be very rigid in what they cover. However, there are a few limited providers that will cover any out-of-pocket costs except doctor’s co-pays and prescription drug co-pays. There are even a few gap insurance providers that provide other ancillary benefits, at no net costs to the employer or the employee, such as an annual biometric exam, health coaches and even nutritionists.

Once the employees enroll, their participation allows the employer to take a pre-tax premium of $400 - $1,600 a month for the gap insurance plan, which can then be reimbursed in part (or whole) to the employee by the gap insurance provider.

So, what is really happening here?

We are reducing the employee’s taxable income by $400 - $1,600 a month. The result is; the business is matching less in FICA and payroll taxes, and the employee’s net pay will increase (average increase in net pay is $100 - $200 a month).

The caveat is, the employee does not get to keep the increase in their net pay, they must use the increase in their net pay on additional benefits. Those benefits can be but are not limited to; disability income insurance, long term care insurance, life insurance ect.


The below example gives a before and after of an employee paycheck:


The above illustration shows an example of a "before" and "after" paycheck for an employee that participates in the program. This example shows the employee used their tax credits to purchase additional life insurance and an accident plan. Actual insurance benefits offered are determined by the employer and the employee.


In the above example you see that the entire increase in net pay is used for additional benefits and the employee's net pay did not change.

When rolling out a plan structure like this, I can guarantee some employees will ask “can I just keep the increase in my net pay?”

As I’ve already covered, but I want to be explicitly clear with, the answer is; absolutely not. There are several sections, and subsections of the IRS code that clearly prohibit an employer from giving a “cash” incentive to their employees to create a tax benefit for the business. If the employee were to keep the increase in their pay, it may be interpreted as a cash incentive. However, by using the net increase to purchase additional healthcare and insurance benefits, we are in complete compliance with the tax code, and the benefits are clearly not a CASH incentive.

It is important when we are doing advanced tax planning work and implementing plans like this, that we take full advantage of the tax code. What is equally as important is that we do not abuse the tax code.

By ensuring that we are compliant and not abusing the tax code we are doing several things. The most important being; protecting our clients from any tax consequences, back taxes, penalties or fees. To put any of those compliance concerns at ease, when utilizing this structure, it’s not the employer that’s at any compliance risk. The reimbursements are being done by the gap insurance provider, directly to the employee. Therefore, the compliance risk falls on the gap insurance provider not the employer. So, if there were to be a change in the tax code (which none of our experts currently are anticipating), and if in the extremely rare scenario that the IRS were to retroactively go after any unpaid taxes, they would be going after the gap insurance provider.

A common question I get from business owners is “Why isn’t every business doing this?”

There are a couple reasons; not all businesses are eligible for a plan like this. For a business to be eligible, the business must currently have a health care plan in place along with a Cafeteria Plan. You cannot have a limited medical benefit plan, without first having a health care plan and Cafeteria Plan. The business also must have 25 or more W2 employees making more than $25,000 a year. Also, while it does not eliminate eligibility, this strategy is much easier to implement if the employees’ pay is consistent or they have a base salary. Remember, we are taking out a premium pre-tax, and reimbursing that same premium post tax to create the tax savings for both the business and the employee. It’s much easier to determine how to do so with salaried employees. This tends to eliminate many businesses that have a lot of hourly and/commissionable employees.

The primary reason we don’t see businesses take advantage of strategies like this is; “it seems cumbersome,” or “seems like more work.”

And those objections are correct. However, I don’t know of a way to increase profit margins, increase employee retention and increase the rate of return on the investment to employees that won’t require some additional work.

Having a background in business consulting, my experience was; generally profit margin increases and/or business expense reductions are done at the expense of the employees and rarely in the form of benefits to them.

When you take the concerns and needs of employees into account, and incorporate them into your business model, the likely outcome is employees that will feel more valued and more productive. According to the experts at the Society of Human Resource Management:

-50 percent of HR professionals said that wellness initiatives decreased company healthcare costs
-Two-fifths of HR professionals said that wellness initiatives decreased unplanned absence
-And one-third of HR professionals said that wellness initiatives increased work productivity

And to our surprise 76% of Millennials said benefits customization was important for increasing their loyalty to their employers, compared to just 67% of baby boomers. When you consider which demographic is retiring and which is staying in the workforce and/or being hired, benefits customization should be on the forefront of employers.



Dan Nuwash, MBA is the Founder and Managing Partner of Finance For Thought and can be reached through our website. You can also schedule a quick introductory Zoom meeting with our team if you'd like some additional information.




TAX- To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.


TAXES- This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions.