A Section 125 cafeteria plan lets your employees pay for health insurance premiums and eligible expenses with pre-tax dollars — saving both you and your employees 7.65% in FICA taxes on every dollar contributed. Buffer sets up and administers the entire plan so you stay compliant and keep more money where it belongs.
Calculate Your Savings →A Section 125 plan — named after Section 125 of the Internal Revenue Code — is a written plan document that allows employees to elect certain benefits on a pre-tax basis. When employees contribute to their health insurance premiums through a Section 125 plan, those contributions are deducted from their gross pay before federal income tax and FICA taxes are calculated.
This reduces the employee's taxable income, which means they pay less in federal income tax and less in FICA (Social Security at 6.2% plus Medicare at 1.45%, totaling 7.65%). The employer also saves their matching FICA portion — 7.65% — on every dollar employees contribute pre-tax. The savings are automatic and ongoing.
The IRS requires a written plan document to be in place before any pre-tax deductions can be taken. Without one, the pre-tax treatment is not valid.
Allows employees to pay their share of group health, dental, and vision premiums with pre-tax dollars. This is the foundation of most Section 125 plans and the simplest component to administer.
Employees set aside pre-tax dollars to cover eligible out-of-pocket medical expenses such as copays, prescriptions, and dental work. Annual contribution limits are set by the IRS.
Employees can contribute pre-tax dollars toward eligible dependent care expenses — daycare, preschool, before/after school programs, and elder care — up to IRS annual limits.
For employees enrolled in a high-deductible health plan (HDHP), a Section 125 plan can facilitate pre-tax Health Savings Account contributions through payroll deduction.
The FICA savings from a Section 125 plan are straightforward to calculate and significant to your bottom line. Here is a real-world example.
If you offer group health insurance but don't have a Section 125 plan, you and your employees are overpaying taxes. It's that simple.
Operating without a valid plan document — or deducting premiums pre-tax without one — exposes your business to real financial and regulatory risk.
Without a Section 125 plan, employee premium contributions are deducted from after-tax pay. Both you and your employees pay FICA taxes on money that could have been contributed pre-tax.
The employer pays 7.65% in FICA taxes on every dollar of employee premium contributions that should have been pre-tax. Over time, this adds up to tens of thousands in avoidable cost.
If you are taking employee premium deductions pre-tax without a valid written plan document, the IRS can reclassify all deductions as taxable income and assess back taxes plus penalties and interest.
Both the Department of Labor and the IRS can audit your benefits program. A missing or deficient plan document is a common audit trigger and a straightforward compliance failure.
Without proper testing, a Section 125 plan can be found to disproportionately benefit highly compensated employees, causing those employees to lose their pre-tax benefit retroactively and triggering corrective tax filings.
Buffer Insurance does not just advise on Section 125 plans — we administer them. From initial plan setup to annual compliance testing, we manage every component so you can focus on running your business.
We draft an IRS-compliant Section 125 plan document customized to your specific benefits offering, eligibility rules, and plan year. This is the legal foundation that authorizes pre-tax deductions.
Each plan year, we review and update your plan document to reflect benefit changes, contribution adjustments, and any regulatory updates that affect your plan.
We prepare the Summary Plan Description — the required employee-facing document that explains how the plan works, eligibility, election procedures, and participant rights.
We conduct the required annual tests — eligibility test, benefits and contributions test, and key employee concentration test — and advise on corrective action if any test trends toward failure.
If your plan includes a Flexible Spending Account, we manage claims processing, participant portals, debit card programs, and year-end forfeitures. Employees get a seamless experience.
We monitor regulatory changes at the federal and state level and advise on plan amendments when needed. You will never be caught off guard by a compliance change that affects your plan.
If your employees contribute anything toward their health insurance premiums, you need a Section 125 plan. There is no exception to this.
Any employer offering group health insurance should have a Section 125 plan, regardless of company size. If employees pay a share of the premium, this is the mechanism that makes those contributions pre-tax.
Employers with 10 or more employees see the most significant FICA savings, but even smaller groups benefit from the tax reduction and the compliance protection a written plan document provides.
Employers who offer FSA or HSA benefits are required to have a Section 125 plan in place. These account types cannot legally operate without the underlying cafeteria plan framework.
Employers currently deducting premiums pre-tax without a written plan document are technically out of compliance and at risk of IRS reclassification. Getting a proper plan document in place should be a priority.
Direct answers to the questions we hear most from employers evaluating or managing Section 125 cafeteria plans.
A Section 125 plan works best as part of a well-structured benefits program. Explore these related solutions to build a complete compliance framework.