How to Set Up a Section 125 Plan for Your Franchise

Why Franchise Owners Are Choosing Section 125 Plans in 2026

Franchises have unique characteristics that make Section 125 plans especially powerful:

• Large hourly workforces that generate significant FICA tax exposure
• Tight margins where every dollar of payroll tax savings matters
• High turnover that makes competitive benefits a retention tool
• Standardized operations that make multi-location rollout straightforward
• Scalability—savings multiply with each additional location

The average franchise saves $550–$750 per employee per year in FICA taxes alone. For a 200-employee operation, that's $110,000–$150,000 back in your pocket annually.

Step 1: Assess Your Franchise

Before implementing a Section 125 plan, you need a clear picture of your workforce and current benefits landscape.

Key Questions to Answer

• How many W-2 employees do you have? Include all locations. Plans work best with 50+ employees.
• How many locations? Single-site setup is straightforward; multi-location requires coordinated enrollment.
• What payroll system do you use? ADP, Paychex, Toast, Gusto, QuickBooks—all integrate with Section 125.
• What benefits do you currently offer? Health insurance, dental, vision? Section 125 works alongside existing benefits.
• What's your payroll frequency? Weekly, bi-weekly, semi-monthly, or monthly affects contribution scheduling.

Calculate Your Potential Savings

A quick estimate: multiply your total employee count by $550–$750. That's your projected annual FICA savings range. We provide a detailed savings analysis during the consultation phase that accounts for your specific payroll data and participation assumptions.

Step 2: Choose Your Plan Type

There are three main Section 125 plan structures. The right one depends on your goals and workforce.

Option A: Premium Only Plan (POP)

The simplest Section 125 plan. Employees pay existing health insurance premiums with pre-tax dollars. Low administrative burden, but limited tax savings since it only applies to employees already paying health insurance premiums.

Best for: Businesses that already offer group health insurance and want basic payroll tax savings.

Option B: Full Cafeteria Plan

Offers a menu of benefits including health premiums, FSAs, dependent care accounts, and other qualified benefits. More complexity but more flexibility.

Best for: Mid-size businesses that want to offer multiple benefit options.

Option C: Cafeteria Plan with Hospital Indemnity Insurance (Recommended)

This is our specialty and what we recommend for most franchise owners. It combines the Section 125 framework with fully insured hospital indemnity coverage, providing:

• Maximum FICA savings—every participating employee generates tax savings, not just those with health insurance
• Tangible employee benefits—cash payments for covered health events, telemedicine, preventive care
• High participation rates—typically 80%+ because employees see real value
• Zero net cost—the program pays for itself through the tax savings it generates

Best for: Franchises with 50+ employees that want maximum savings and employee impact.

Step 3: Plan Documentation and Compliance

Every Section 125 plan requires specific legal documentation to satisfy IRS requirements. Here's what's involved:

Required Plan Documents

• Written plan document: A formal document describing the plan's benefits, eligibility rules, election procedures, and administration
• Summary Plan Description (SPD): A plain-language version of the plan document provided to employees
• Enrollment forms: Employee election forms documenting benefit selections
• Section 125 plan amendment: If modifying an existing plan

Compliance Requirements

• Nondiscrimination testing: IRS requires that Section 125 plans don't disproportionately favor highly compensated employees. Annual testing ensures compliance.
• Eligibility rules: Must define who qualifies (typically all W-2 employees meeting minimum service requirements). Owners and partners of pass-through entities generally cannot participate.
• Election timing: Employees must make benefit elections before the plan year begins or within 30 days of eligibility. Mid-year changes are only allowed for qualifying life events.
• ERISA considerations: Most Section 125 plans are subject to ERISA, though simplified reporting applies to small plans.

We handle all of this. Our team drafts the plan documents, manages compliance testing, and keeps your plan current with regulatory changes.

Step 4: Payroll Integration

Pre-tax deductions must be properly coded in your payroll system. This is a critical step—incorrect setup can create compliance issues.

Common Franchise Payroll Systems

We've integrated Section 125 plans with all major payroll providers used by franchise operators:

• ADP (Run, Workforce Now, TotalSource)
• Paychex (Flex, PEO)
• Toast (popular for restaurant franchises)
• Gusto
• QuickBooks Payroll
• Paylocity
• Paycom

What Gets Configured

• New pre-tax deduction code(s) for Section 125 contributions
• Proper tax treatment flags (exempt from FICA, federal income tax, and applicable state taxes)
• Deduction amounts per employee based on their benefit elections
• W-2 reporting codes for Box 14 (the "Cafe 125" line employees see at tax time)

We coordinate directly with your payroll provider or in-house payroll team to ensure everything is configured correctly before the first live payroll.

Step 5: Employee Enrollment Across Locations

Getting employees enrolled is where the rubber meets the road. High participation means high savings.

Enrollment Process

1. Information sessions: We conduct presentations at each location (in-person or virtual) explaining the benefits, how pre-tax deductions work, and what employees receive
2. One-on-one questions: Employees get answers to personal questions about how the plan affects their specific situation
3. Election forms: Employees complete enrollment forms selecting their benefits
4. Confirmation: Each participant receives confirmation of their elections and benefit details

Multi-Location Coordination

For franchises with multiple sites, we stagger enrollment sessions across locations to ensure every employee has the opportunity to participate. Location managers receive a coordination toolkit with:

• Session scheduling templates
• Employee communication materials
• FAQ sheets to address common questions
• Enrollment tracking tools

Typical Participation Rates

We consistently see 80%+ enrollment because the value proposition is clear: employees get health benefits and higher take-home pay. The most common reaction? "Why didn't we have this sooner?"

Step 6: Ongoing Administration

Setting up the plan is just the beginning. Ongoing administration ensures the plan stays compliant and continues delivering value.

What We Handle

• Claims processing: Hospital indemnity claims are processed and paid directly to employees
• New hire enrollment: New employees are enrolled as they meet eligibility requirements
• Termination processing: Departing employees are properly removed from the plan
• Annual nondiscrimination testing: We run the required IRS compliance tests each year
• Plan document updates: We amend documents as regulations change
• Employee support: A dedicated support line for employee questions about benefits and claims

What You Handle

• Run payroll as usual: Pre-tax deductions process automatically through your existing payroll system
• Notify us of changes: New hires, terminations, and qualifying life events

That's it. We take care of everything else.

Multi-Location Considerations for Franchises

Franchise operations introduce a few additional factors worth addressing:

Single EIN vs. Multiple EINs

If all your locations operate under one EIN, a single Section 125 plan covers everyone. If each location has its own EIN (common in some franchise structures), each entity needs its own plan—but we centralize administration so it's seamless.

State-Specific Rules

If your franchise spans multiple states, we ensure compliance with each state's tax treatment of Section 125 contributions. Most states follow federal treatment, but a few (like New Jersey and Pennsylvania) have unique rules.

Franchisor Requirements

Some franchise agreements have provisions about employee benefit programs. We review your franchise agreement to ensure the Section 125 plan aligns with any franchisor requirements or restrictions.

Timeline: From Consultation to First Payroll

Here's a realistic timeline for a typical franchise implementation:

Total: 30–60 days from initial consultation to your first payroll with Section 125 savings.

Ready to Set Up Your Section 125 Plan?

We handle the entire setup process for franchise owners—from plan documentation and compliance to payroll integration and employee enrollment. There's no out-of-pocket cost, no disruption to your operations, and savings start with the first payroll.

Here's what you need to get started:

• Total employee count across all locations
• Your payroll provider name
• A 15-minute phone consultation

We'll provide a detailed savings estimate within 48 hours.