Section 125 · Cafeteria Plans
What is a Section 125 plan?
A cafeteria plan written into the IRS tax code since 1978 that lets employees pay for benefits with pre-tax dollars. Paired with fixed-indemnity insurance, it raises take-home pay and cuts your payroll taxes — at no out-of-pocket cost.
Your team takes home more. You cut payroll taxes. Nobody works harder.
Your team earns more. You spend less. Nobody works harder.
Take a 50-person business. Each employee takes home about $1,000 more a year (typically a 4–6% bump) — and you save $650–$850 per employee. With every employee auto-enrolled, that’s real money to your bottom line, every payroll.
$650 × 50 employees = $32,500+ added to your bottom line
— and up to $42,500 at the high end, with no new managerial work for you or your staff.
Employee take-home
+ ~$1,000/yr
Your payroll taxes
− $650–$850/emp
… at $0 out-of-pocket cost to either of you
See it on one paycheck
A $15/hour employee earning $31,200 a year, paid bi-weekly. Same gross pay — but pre-tax premiums, a claim benefit, and lower withholding put more in their pocket.
| Per paycheck (bi-weekly) | Without the plan | With the plan | Difference |
|---|---|---|---|
| Gross income | $1,200.00 | $1,200.00 | $0.00 |
| Pre-tax premium | $0.00 | $553.84 | $553.84 |
| Taxable income | $1,200.00 | $646.16 | −$553.84 |
| Tax withholding | $202.69 | $74.83 | −$127.86 |
| Claim payment | $0.00 | $461.54 | +$461.54 |
| Net take-home pay | $997.31 | $1,032.87 | +$35.56 |
| Tax withholding breakdown | |||
| Federal tax | $78.42 | $16.35 | −$62.07 |
| Social Security | $74.40 | $40.06 | −$34.34 |
| Medicare | $17.40 | $9.37 | −$8.03 |
| State tax | $18.07 | $1.30 | −$16.77 |
| SDI | $14.40 | $7.75 | −$6.65 |
| Total tax withholding | $202.69 | $74.83 | −$127.86 |
+$35.56 per paycheck = $924.48 more take-home a year
Example for one employee earning $15/hour, paid bi-weekly. Each person’s exact numbers depend on their wage and state.
What you save as the employer
The same paycheck, from your side. Lower taxable wages mean lower FICA on every employee — here’s one employee on a mid-tier plan (Plan 1200).
| Per employee | Without the plan | With the plan | You save |
|---|---|---|---|
| Gross income (bi-weekly) | $1,200.00 | $1,200.00 | $0.00 |
| Pre-tax premium | $0.00 | $553.84 | $553.84 |
| Employee taxable income | $1,200.00 | $646.16 | −$553.84 |
| Your FICA (bi-weekly) | $91.80 | $49.43 | $42.37 |
| Your FICA (annual) | $2,386.80 | $1,285.20 | $1,101.60 |
$621.60 net savings per employee, per year
$1,101.60 gross FICA savings − $480 admin (Plan 1200)
Your savings scale with the plan you choose
A higher-tier plan delivers more benefit — and more savings. Here’s the net savings per employee, per year, for each plan:
Plan 1500
$897
Plan 1200
$621
Plan 1050
$484
Plan 900
$346
Plan 750
$209
Plan 600
$71
Per-employee figures shown for Plan 1200. Your savings scale with the plan tier you choose and each employee’s wage and state.
Sounds too good to be true?
It’s the first thing every owner thinks — the money has to come from somewhere. It does, and it’s completely legitimate. Here’s exactly where.
Added on top · pre-tax
Section 125 fixed-indemnity benefit
Virtual care · prescriptions · hospital cash · dental & vision
Unchanged
Your existing health plan
Stays exactly as it is — nothing to switch
It’s a fully insured fixed indemnity plan
Stick with us — the name means very little at first, but this is the part that helps your business. In plain terms, it’s a supplementary health benefit that lays on top of your employees’ current coverage.
You don’t change your underlying health plan. You keep everything exactly the same — this simply sits on top.
What your team actually gets
Because the benefits are real and used often, the plan doubles as a recruiting and retention tool — not just a tax line item.
Unlimited virtual care
Primary, urgent, behavioral & dermatology visits — no copay.
$0-copay prescriptions
On 5,000+ of the most commonly prescribed generics.
Hospital indemnity
Cash benefits paid directly for covered hospital stays.
Dental, vision & hearing
Big savings across large national provider networks.
Preventive care
Annual health screenings and risk assessments.
Higher take-home pay
A 4–6% increase for participating employees.
Where your savings actually come from
Every employee is auto-enrolled (and free to opt out). Their premium is paid pre-tax under Section 125, which lowers their taxable wages.
Lower taxable wages mean employees take home more — and you owe less in FICA, FUTA and state unemployment taxes on every payroll. Better coverage on top, lower taxes underneath.
Employees
take home more (4–6%)
You
owe less FICA, FUTA & SUTA
“Yes, it’s fully compliant. Section 125 has been in the IRS tax code since 1978 — fully insured through an A+ rated carrier and filed with each state’s Department of Insurance.”
Common questions
- What is a Section 125 plan?
- A Section 125 plan (a "cafeteria plan") is a part of the IRS tax code, in place since 1978, that lets employees pay for certain benefits with pre-tax dollars. Paired with fixed-indemnity insurance, it raises take-home pay and lowers your payroll taxes — at no out-of-pocket cost.
- What does “Section 125” or “Café 125” mean on my W-2?
- It’s the amount your employer deducted from your pay before taxes under their Section 125 cafeteria plan — usually for health benefits. Because it’s pre-tax, it lowers your taxable wages, so you pay less in federal income and FICA taxes.
- Does it replace our existing health insurance?
- No. It’s a supplementary fixed-indemnity benefit that lays on top of your current coverage — you keep your existing health plan exactly as it is.
- Is there any cost to the employer or employee?
- No net cost. The plan is funded through the payroll-tax savings it creates, so it doesn’t add out-of-pocket cost for you or your team.
See your numbers
Your team takes home more, you cut payroll taxes, and it costs you nothing. Run your headcount through the calculator, or get the exact figure from an advisor.
Questions? Email us at hello@taxbenefitstrategies.com · No cost, no obligation.