Too Embarrassed to Admit: I'm an Employer and I Have NO Idea What a Section 125 Plan is

It's ok, there will be no shaming here. But, for the sake of your business, you'll want to know what it is - because you and your employees will benefit from it.

When it comes to offering employee benefits, businesses worry about cost. A Section 125 plan, (aka a Cafeteria Plan) is one of the simplest ways for both employers and employees to save money on those dreaded taxes, all the while providing tangible benefits for the now.

How a Section 125 Plan Works

A Section 125 plan allows employees to pay their share of health insurance premiums with pre-tax dollars instead of after-tax income. This reduces their taxable income, which means they keep more of their paycheck. Employers, in turn, benefit from reduced payroll tax obligations because taxable wages are lower.

Think of it as a win-win: employees save on income tax, and employers save on payroll taxes.

But Why Is It Called a "Section 125 Plan"?

Because the tax benefits you get from it are derived from - you guessed it - Section 125 of the Internal Revenue Code. Moving along...

Benefits for Employees

1. Tax Savings – By paying premiums with pre-tax dollars, employees lower their taxable income. This can result in hundreds of dollars saved each year, depending on the cost of the plan and their tax bracket.

2. Affordable Health Coverage – Because premiums effectively cost less, health insurance becomes more accessible.

3. Flexible Options – Depending on how the plan is set up, employees can often choose from multiple benefit options such as medical, dental, and vision coverage. All of these benefits can be paid tax-free.

   
   

Benefits for Employers

1. Lower Payroll Taxes – Employers don’t pay Social Security and Medicare taxes (FICA) on the amounts employees contribute pre-tax. This can add up to significant savings each year.

2. Stronger Benefits Package – Offering a Section 125 plan enhances your benefits package at little or no direct cost, making your business more competitive in attracting and retaining employees.

3. Employee Satisfaction – When employees understand how the plan benefits them, they see additional value in working for you as their employer.

   
   

Why Businesses Should Consider It

Implementing a Section 125 plan is generally inexpensive and easy to set up with the help of a benefits advisor. For small businesses especially, it provides a valuable middle ground: you can offer health insurance and meaningful tax savings without dramatically increasing expenses.

At the end of the day, a Section 125 plan is more than a tax strategy—it’s a way to show employees you value them while also keeping your business financially efficient.

There are situations in where adding a Section 125 plan may not make sense. It's best to consult with your benefits advisor for advice about your company.

If you're interested in offering health insurance within the context of a Section 125 plan, reach out to us at: tom@valdezinsurancesolutions.com.