A manufacturer with 220 people on payroll might have 180 of them hourly, spread across two plants and three shifts, with a union bargaining unit at one site, a non-union crew at the other, and a steady flow of temp-to-hire workers coming in through a staffing agency. A Section 125 plan fits that kind of workforce well, because the savings scale with hourly headcount. It just has to be designed around shifts, plants, unions and temps instead of copied from an office template.
Why hourly headcount is where the savings are
When an employee pays for qualified benefits through a Section 125 plan, those dollars come out of pay before federal income tax and FICA. The employer stops paying its 7.65% FICA share (6.2% Social Security up to the annual wage base, plus 1.45% Medicare) on every pre-tax dollar. Most hourly production workers earn well under the Social Security wage base, so the full 7.65% applies to everything they run through the plan.
sec125.com's figures put employer savings at around $600 to $1,200 per participating employee per year. In the site's example, an employee earning $50,000 who puts $3,000 pre-tax toward benefits is taxed on $47,000, and the employer avoids FICA on the $3,000. At those figures, 150 participating employees works out to roughly $90,000 to $180,000 a year, without changing the health plan you already have.
Overtime and variable paychecks
Manufacturing paychecks move with the schedule. Section 125 handles that well:
- Deductions are a fixed amount per pay period. The employee elects an annual amount, payroll divides it across the year, and overtime does not change the deduction.
- Overtime does not raise the savings. FICA is avoided on the pre-tax deduction, not on gross pay. Heavy overtime makes the deduction easier to afford, which helps participation, but the per-dollar saving stays the same.
- Overtime rates are calculated on gross pay. An employee's pre-tax salary reduction is still part of their wages for figuring the regular rate, so it does not lower overtime pay. Employer contributions to a bona fide benefit plan are treated differently. Have your payroll provider confirm the setup.
Multiple shifts and enrollment
The plan rules are the same on every shift. What breaks down is enrollment. If the meetings are held at 10 a.m. in the main plant's break room, second and third shift will not show up, and participation is what drives the savings.
- Hold enrollment sessions at each shift change, or meet each shift in its own break period.
- Offer phone or mobile enrollment so a night-shift worker can enroll from home.
- Provide materials in the languages your floor actually speaks.
Multiple plants and entities
Plants under one company
Two or three plants owned by the same legal entity are one employer. One plan document, one plan year and one nondiscrimination test cover every site.
Plants in separate LLCs
Many manufacturers hold each plant in its own entity. Under the controlled group rules, commonly owned businesses are generally treated as a single employer for Section 125 nondiscrimination testing. You can still adopt the plan in one entity and have the others participate, but you must test them together. How that test works is covered in our guide to Section 125 compliance testing. Ownership structures differ, so confirm the controlled group analysis with your tax adviser.
Union and non-union crews
This is where manufacturers most often guess wrong. The general federal rule: employees covered by a collective bargaining agreement can be excluded from the company's Section 125 plan for nondiscrimination purposes when benefits were the subject of good-faith bargaining. Many unionized plants run the plan for non-union hourly, salaried and office staff only. That design is common and compliant.
Whether bargaining-unit employees can or should join depends on things this article cannot answer for you:
- The collective bargaining agreement. It may set how health premiums are paid, address payroll deductions, or require bargaining before any benefit change.
- The union's own plans. If coverage comes through a multiemployer trust fund, the fund's rules control how contributions are made and whether any employee share can be paid pre-tax.
- Your labor counsel. Offering bargaining-unit employees a new benefit without going through the union can raise labor law issues of its own.
Temp-to-hire workers
A worker placed by a staffing agency is usually on the agency's W-2 during the temp period. They are the agency's employee for benefits, not yours, and they cannot be in your plan until you hire them. Edge cases exist where the common-law employer question is less clear, so check with your adviser if the agency only handles payroll.
Once a temp converts, three plan design choices matter:
- Waiting period. Decide whether eligibility starts on the first of the month after hire or after 30, 60 or 90 days. The ACA caps waiting periods for group health coverage at 90 days. Decide whether time as a temp counts.
- Mid-year entry. A new hire makes an election when they become eligible, not at the next open enrollment.
- Status changes. A move from part-time to full-time that affects benefit eligibility is generally a permitted reason to change an election mid-year. Write it into the plan document so HR is not deciding case by case.
Choosing the plan type
Most manufacturers start with a premium-only plan, which lets employees pay their share of health, dental and vision premiums pre-tax. A plant where most hourly workers decline the medical plan should look at options beyond premium-only, because the savings depend on dollars actually moving through the plan. See POP, PCMP and full cafeteria plans compared for how each one works.
What HR and payroll have to run
- A written plan document and a summary plan description for employees.
- A Section 125 deduction code set up correctly in each payroll system, at every plant.
- Enrollment at hire and at open enrollment, reaching every shift.
- Annual nondiscrimination testing across the whole controlled group.
Frequently asked questions
Our workers get a lot of overtime. Does that change the savings? No. The FICA saving is on the pre-tax amount each employee elects, which is a fixed deduction per paycheck. Overtime makes the deduction easier to afford, which can raise participation, but it does not change the saving per dollar.
Can we offer the plan at our non-union plant and not the union plant? Generally yes, if benefits for the bargaining unit were the subject of good-faith bargaining. Check the CBA and any union trust fund rules, and confirm with your tax adviser and labor counsel before you finalize the design.
Are temp workers from our staffing agency eligible? Not while they are on the agency's payroll. They become eligible under your plan's rules once you hire them as your own W-2 employees.
Want a savings estimate built on your actual hourly headcount, shifts and plants? Talk to sec125.
General information about federal rules, not tax or legal advice. Union, controlled group and state rules vary; confirm your situation with a tax adviser.