Section 125 plans provide a unique opportunity for both employers and employees to save money and improve benefit offerings. By allowing pre-tax payroll deductions for certain qualified benefits, Section 125 cafeteria plans reduce employees' taxable income and lower employer payroll tax liability—without requiring budget increases.
Employees may either maintain the same net take-home pay or see a modest increase, depending on the structure of the plan and their personal elections. To ensure no negative impact on net pay, employers often conduct a payroll review and employee census before enrollment.—without requiring budget increases.
In this guide, we break down the advantages from both perspectives.
Employers implementing Section 125 plans enjoy significant cost savings and operational advantages.
Lower Payroll Taxes
Every dollar an employee contributes to a Section 125 plan reduces the employer’s taxable payroll. On average, employers save $600 to $1,200 per year per participating employee through reduced FICA (Social Security and Medicare) taxes.
Better Benefits Without Budget Increases
Section 125 allows employers to offer enhanced benefits such as telehealth, preventative care, and life insurance without increasing wages or paying more in premiums. This provides high perceived value to employees with no net cost to the company.
Improved Retention & Recruitment
Offering meaningful, no-cost benefits helps businesses attract top talent and retain current employees. As benefits become more important in employee decision-making, Section 125 becomes a strategic tool for HR teams.
Seamless Integration With Existing Plans
Section 125 plans are designed to layer on top of existing group health or major medical plans. No need to replace or restructure your current benefit offerings.
Fully Managed With Minimal Overhead
Many providers offer fully managed Section 125 programs, which integrate with payroll and HRIS systems, minimizing the administrative burden for internal teams.
Section 125 cafeteria plans create immediate financial and health-related advantages for employees.
Family and Dependent Coverage
Many Section 125 plans allow employees to extend benefits to spouses and dependents without additional taxable income, making it easier to support family healthcare needs.
More Take-Home Pay or No Reduction
Because contributions to a Section 125 plan are made pre-tax, employees may see an increase in net pay, or in many cases, maintain the same take-home income while gaining access to additional benefits. The financial impact varies by employee and plan design.
To ensure there’s no negative impact, employers typically run a payroll review and employee census before enrolling in the program. This process helps confirm that each eligible employee maintains or improves their net pay after pre-tax deductions and benefits are applied.
To ensure employees are not negatively affected, employers typically run a payroll review and employee census before enrollment. This confirms that after accounting for pre-tax deductions and added benefits, employees maintain or improve their net pay.
Access to Valuable Benefits
Depending on the plan, employees may gain access to:
Health, dental, and vision insurance
Group term life insurance
Virtual urgent care and telehealth
Mental wellness programs and EAPs
Preventative screenings and lab access
Easy Enrollment and Year-Round Access
Most Section 125 plans integrate with employer portals or mobile platforms, allowing employees to review, manage, and use benefits year-round—not just during open enrollment.
Protected by IRS Compliance Standards
Section 125 plans must meet IRS and ACA requirements. Employees can be confident their elections are handled in accordance with tax law, and they receive clear communication on rights and eligibility.
Section 125 plans create a powerful win-win:
Employers save money, improve retention, and enhance benefit offerings without spending more.
Employers keep or increase their take-home pay..
When properly implemented and managed, a Section 125 plan becomes one of the most effective tools for improving workplace satisfaction and financial efficiency.
Employers typically save $600–$1,200 per participating employee per year through reduced payroll taxes.
It depends. Employees may see an increase in take-home pay, or maintain the same net pay while gaining additional benefits. A payroll census is typically done before enrollment to ensure no one is negatively impacted.
Absolutely. They are designed to complement existing group plans.
No. Section 125 plans are layered on top of current offerings, not replacements.
A payroll census is a review of employee pay and benefit structures. It helps employers ensure that Section 125 plan enrollment won’t negatively affect employee take-home pay.
Yes. Participation is voluntary. Employees can choose not to elect any pre-tax benefits and receive their full taxable wages.
Offering no-cost, tax-advantaged benefits improves overall compensation value. This can help attract new talent and retain existing employees.
Whether you're an HR manager, business owner, or employee, navigating Section 125 can be confusing. We're here to help.
Submit your question below and our team will get back to you within 1-3 business day.
