How 125 Plans Work?
Simple Tax Savings for Businesses & Employees
If you’re a small business owner or HR decision-maker, you know how expensive it can be to offer quality employee benefits—or give out raises that actually make a difference in take-home pay.
A Section 125 Cafeteria Plan offers a better way. It’s a legal, IRS-approved method to help both your business and your employees save money—without increasing payroll costs or adding new staff.
Here’s what it is, how it works, and why so many companies are switching to this smarter benefits strategy.
Let’s walk through it step-by-step.
A Section 125 Plan lets employees pay for eligible benefits—like healthcare and prescriptions—before taxes are taken out of their paycheck.
That means:
Employees get more take-home pay
Employers pay less in payroll taxes
Everyone wins
These plans are often overlooked by small businesses because they seem complex or hard to manage. But with the right setup, they’re simple, compliant, and very cost-effective.
Key Benefits for Your Business & Team:
- Plans often include coverage like primary care visits, telemedicine, and mental health support. Your team gets practical care options that help them stay healthy and productive.
- A Section 125 Plan works alongside your existing benefits. It’s an add-on that helps both you and your employees get more out of the plans you already offer.
- We connect you with trusted providers who handle compliance and paperwork. You won’t have to navigate IRS rules alone or get buried in admin work.
- Your employees can choose the benefits that matter most to them—from health care and prescriptions to telehealth and even pet care. That flexibility makes the plan feel personal and valuable.
Every pre-tax dollar employees contribute through a 125 Plan lowers your payroll tax liability. That means you save 7.65 percent in FICA taxes per participating employee without reducing pay or hours.
Employees use pre-tax dollars to cover eligible benefits, which reduces their taxable income. The result is more money in their pockets without you needing to raise salaries.
Whether you have 5 employees or 500, a 125 Plan scales to fit your business. It’s a flexible solution that delivers real value without complicated setup or high costs.
These key benefits make Section 125 Plans a smart, practical choice for both your business and your employees. You save on taxes, your team takes home more, and everyone gains access to valuable care. It’s a simple solution that delivers real results without adding extra cost or complexity.
How Does a Section 125 Plan Actually Work?
A Section 125 Plan is a simple way to save money as an employer while helping your employees keep more of their pay. The example below shows just how effective this approach can be for your business. For example if You offer your employees a 125 Plan that lets them pay $250/month for health-related benefits pre-tax. That’s $3,000/year per employee:
They save on income taxes
You save 7.65% in FICA tax on that $3,000
That’s $229.50 in savings per employee, per year
Multiply that by 10, 20, or 50 employees and you’re looking at serious savings
Plus, your team now has access to valuable care that helps them stay healthy and productive.
What Can Employees Use Pre-Tax Dollars For?
Under a properly structured Section 125 Plan, employees can use pre-tax dollars to cover:
Primary care visits
Preventive care and screenings
Telemedicine (24/7)
Urgent care
Generic prescriptions
ID theft protection
Travel club access
Pet care via TeleVet
And more
Depending on the plan provider, additional services like dental, vision, and wellness perks may be available.
Why Haven’t I Heard About This Before?
Honestly, most payroll providers and small business CPAs don’t bring it up unless you ask.
Setting up a Section 125 Plan requires compliance paperwork and third-party documentation, so many businesses avoid it—or don’t know where to start.
That’s why Section 125 Solutions LLC was created:
We guide you through the process and connect you to trusted plan administrators that handle setup, documents, and maintenance—so you don’t have to worry about legal issues or missteps.
✅ Important Note: We are not a law firm or CPA service. We act as a referral partner and consultant, helping you connect to vetted professionals who manage the compliance side.
IRS-Compliant & Risk-Free
- Written plan documents
- Nondiscrimination testing (if required)
- Accurate payroll processing
- Plan setup and renewal dates
What Businesses Should Use a 125 Plan?
- Small businesses with W-2 employees
- Restaurants, franchises, and service-based businesses
- Remote teams or hybrid workforces
- Construction companies and contractors
- Tech startups looking to add value without cash bonuses
Ready to Reduce Business Tax Burden?
A Section 125 Plan can help you save thousands each year while giving employees valuable, tax-free benefits. It’s simple, compliant, and tailored to fit your team.
Request your free savings estimate today and see how much your business could be keeping—starting this month.
Book Your Consultation
Explore how Section 125 plans could save your business over $1,000 per W-2 employee each year. Book a free consultation to see how much you could be losing by not having one.
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