A Section 125 plan, often called a “cafeteria plan,” enables employees to pay for certain benefits using pre-tax dollars. While designed to give employees more flexibility and tax savings, these plans can also provide employers with tangible financial and workforce advantages.
Below is a deeper look at the primary benefits for employers.
When employees contribute to eligible benefits before taxes, those amounts are excluded from gross wages for FICA tax purposes (Social Security and Medicare). This reduces the employer’s tax liability.
Competitive benefits packages remain a key differentiator in today’s labor market. A Section 125 plan can enhance an employer’s benefits offering without adding direct costs. Employees often value the ability to access additional benefits—such as health coverage, preventive care programs, or supplemental insurance—while reducing their taxable income.
By offering more value without increasing wages, employers can position themselves as attractive to both prospective hires and current staff, reducing turnover and the costs associated with recruiting and training replacements.
Annual payroll tax savings can create an ongoing source of extra cash flow for the business. For many employers, this amount is significant enough to:
Reinvest in operations
Fund new equipment or technology
Support employee development initiatives
Offset other rising costs
Because the savings are recurring, companies can factor them into longer-term budget planning with greater confidence.
When employees feel their employer is actively working to improve their benefits and help them keep more of their earnings, it can increase workplace satisfaction. While a Section 125 plan is primarily a tax strategy, it can have secondary effects on morale, loyalty, and engagement.
This is particularly true when the plan includes benefits that address real needs—such as preventative care programs, lower healthcare costs, or supplemental wellness services. The perception of being supported can have as much impact as the financial savings themselves.
Employers that integrate preventive care benefits within their Section 125 offerings may see indirect cost savings over time. Preventive services can help employees identify and address health concerns earlier, potentially reducing the likelihood of more costly treatments down the road.
While results depend on participation and plan design, some organizations find that these preventive measures can lead to lower group health insurance claims and more predictable healthcare spending.
A common concern for employers is whether a Section 125 plan will create more administrative burden. In most cases, this is minimal, as providers handle:
Drafting the required Plan Document and Summary Plan Description (SPD)
Performing annual nondiscrimination testing to maintain compliance with IRS rules
Integrating pre-tax deductions with payroll systems
Managing employee enrollment and communications
For many employers, the process is largely “set it and review it,” requiring only periodic oversight.
$61K–$92K per year for 100 employees, depending on participation and contribution levels.
Improves benefits offerings without increasing wages or direct costs.
Most compliance and administration is handled by the provider.
Enter your employee count and average annual W-2 salary to estimate employer payroll tax savings and average employee tax savings.
Your Estimated Annual Savings
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Per Employee savings: $1,190
3-Year Savings
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5-Year Savings
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