Section 125 Plans (a.k.a. Cafeteria Plans) Help
When Employees Pay Part of Premium

When an employee pays a portion of the premium for his or her health, dental, or vision insurance, we can help you set up a Section 125 plan (also known as Cafeteria Plans). This type of plan enables employees to pay their premium before taxes are deducted from their paycheck; employees save money, because they only pay taxes on the salary they receive after making premium payments. A Section 125 plan also saves the employer money, because the employer’s FICA and worker’s compensation payments are based on the salary after the employee-paid portion of the health, dental, and life insurance premium has been deducted.

Setting Up a Section 125 Plan

It’s important to know that your company can’t just start deducting employees’ premium payments on a pre-tax basis without setting up a specific plan legally. The IRS authorizes Cafeteria Plans under Section 125 of the Internal Revenue Code. To set up an acceptable plan, you need the following:

  • Plan document
  • Summary plan description
  • Corporate resolution
  • Introductory letter
  • Enrollment forms
  • Discrimination testing
  • Dept. of Labor filings
  • Payroll Dept. consulting
  • Completed and filed IRS Form 5500
  • Communication with employees

Professional Benefits & Insurance Services can quickly and easily get proposals from companies to help you set up a Section 125 plan for your company.

 How A Section 125 Premium-Only Plan Saves Money

  Without Sec. 125    With Sec. 125 
Employee’s Monthly Salary $ 2,000 $ 2,000
Medical, Dental, Vision Premium $ 0 $ 100
Taxable Salary:   $ 2,000  $ 1,900 
Employee Payroll Deductions:
       Federal Income Tax @ 15% $ 300 $ 285
       Soc. Sec. Tax @ 7.65% $ 153 $ 145
       State Income Tax @ 4% $ 80 $ 76
       Employee-Paid Premium $ 100 $ 0
Total Spendable Income:   $ 1,367  $ 1,394 
Increase in Spendable Income Per Month:  $ 27/mo.
Increase in Spendable Income Per Year:  $324/yr.
Employer Savings, Assuming Ten Employees and Payments of $100/mo. Per Employee
Annual Salary Reduction: $100/mo. x 12 mos. x 10 employees $ 12,000
Employer Paid Taxes:
         FICA @ 7.65% x $12,000 $ 918/yr.
               Worker’s Comp. Savings @ 2% x $12,000 $240/yr.
Total Employer Savings $1,158/yr.
       Approximate One-Time Cost to Set Up Plan: ($ 395)
               Net First-Year Savings  $ 763