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