Can You Use a Section 125 Plan If You Have a PEO?
Published October 28, 2026 | 4 min read
If your company uses a professional employer organization (PEO) such as Justworks, Insperity, TriNet or ADP TotalSource, you may wonder whether a Section 125 plan can still work for you.
It can. But there is one important difference from a company that runs its own payroll, and you should understand it before you start.
Why a PEO Changes Who Gets the Savings
In a PEO arrangement, the PEO is the employer of record. It reports your employees’ wages and pays the employer payroll taxes under its own tax ID. The Section 125 plan lowers those payroll taxes, so the employer-side savings land with the PEO first.
That means the PEO decides what happens to the employer savings. In practice, PEOs handle it in one of three ways:
- Pass it on: the PEO passes the savings through to your company.
- Share it: the PEO and your company split the savings.
- Keep it: the PEO keeps the employer savings in full.
What Your Employees Still Get
Whatever your PEO decides about the employer savings, your employees still get the program’s benefits and the higher take-home pay that comes from paying for those benefits pre-tax. Take-home pay typically rises about 4–6%.
Questions to Ask Your PEO
- Will you pass the employer payroll tax savings from a Section 125 plan through to us, share them, or keep them?
- Can our payroll representative build the census report the program needs?
- Who on your team should join the payroll setup calls?
We are happy to talk with your PEO directly as part of the setup process.
Not on a PEO?
If you run payroll yourself, with ADP, Paychex, Paylocity, Paycom, Toast, Gusto, QuickBooks Payroll or another provider, the employer savings stay with your business. Most employers save $650–$850 per employee per year. The program requires at least 50 employees.
Frequently Asked Questions
Does a Section 125 plan work with a PEO?
Yes. The program works for companies that use a PEO such as Justworks, Insperity or TriNet.
Who keeps the tax savings when you use a PEO?
The PEO is the employer of record, so it decides what happens to the employer payroll tax savings. Some PEOs pass the savings on, some share them, and some keep them in full.
Do employees still benefit if we use a PEO?
Yes. Employees still get the benefits and the higher take-home pay that comes from paying for benefits pre-tax.