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 on a pre-tax basis, the IRS requires employers to have a Section 125 Plan (also known as a 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. If you’re interested in setting up group employee benefits for your employees, you should check out this page on California group health insurance.

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

Description 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