A Section 125 plan, also known as a cafeteria plan, is an IRS-approved employee benefits program that allows workers to pay for eligible benefits with pre-tax dollars, reducing taxable income for both employees and employers.
Employees choose from a menu of pre-tax benefit options, such as health insurance premiums or preventative care programs, and their contributions are deducted from their paychecks before taxes.
Employers can save $600–$1,100 per employee per year in payroll taxes, improve retention, boost cash flow, and offer competitive benefits at little to no net cost.
Employees pay less in federal, state, and Social Security taxes, and can use pre-tax dollars for healthcare, childcare, and other qualified expenses—often saving hundreds to thousands annually.
Qualified benefits may include health insurance premiums, preventative care management plans (PCMPs), dental, vision, disability, life insurance, and dependent care assistance.
A POP allows employees to pay their share of group insurance premiums with pre-tax dollars, lowering their taxable income and saving both the employee and employer money.
A PCMP focuses on preventative healthcare services, providing benefits like telehealth, wellness programs, and prescription coverage, while maximizing employer payroll tax savings.
Most full-time and part-time common-law employees are eligible. Independent contractors, partners, and certain owners may not qualify.
No, offering a Section 125 plan is optional, but many employers adopt one for the significant tax and retention benefits.
Setting it up yourself can take 3–6 months with substantial administrative work, while using a provider typically takes 30–45 days with minimal HR involvement.
Yes, providers charge a monthly administration fee, but it’s almost always covered by the tax savings, meaning there’s no true out-of-pocket cost.
Yes, employers can stack multiple Section 125 plans as long as each offers different benefits and total contributions stay within IRS limits.
Employers must have a written plan document, perform annual nondiscrimination testing, and ensure only IRS-approved benefits are offered.
If your plan is non-compliant, employees may lose tax benefits and owe back taxes, and employers could face IRS penalties.
This IRS-required test ensures the plan doesn’t disproportionately favor highly compensated or key employees over the rest of the workforce.
Depending on benefits offered, contributions can be substantial—PCMPs can allow up to $16,000 per employee per year in pre-tax contributions.
Yes. Employees can use pre-tax dollars for spouse and dependent benefits, lowering total household costs.
Mid-year changes are only allowed if there’s a qualifying life event, such as marriage, divorce, or the birth of a child.
Yes. Many employers integrate health savings accounts (HSAs) and flexible spending accounts (FSAs) within their cafeteria plans.
Not usually. A properly designed plan can keep take-home pay the same or higher while delivering additional benefits.
Savings are calculated by multiplying the total pre-tax payroll deductions by the employer’s payroll tax rates.
You don’t need to file with the IRS to start, but you must have a compliant written plan document and follow all IRS regulations.
Yes. Even companies with as few as 5–10 employees can see meaningful tax savings.
Employers can save tens of thousands annually—some large companies save hundreds of thousands—depending on employee participation.
Yes. About 98% of businesses work with a provider for compliance, faster setup, and reduced HR workload.
Yes, when designed correctly, Section 125 plans work alongside Affordable Care Act (ACA) requirements.
The administrator manages enrollments, compliance testing, record-keeping, and employee support.
Yes. Many plans, especially those that include PCMPs, have no employee out-of-pocket cost.
At least once a year to confirm compliance, update benefits, and optimize savings.
Decide whether to self-administer or work with a provider, create a compliant plan document, and enroll eligible employees.
