What’s the Better Option for Employers?

The Employer Benefits Dilemma

Offering health benefits is one of the biggest challenges for businesses today. Rising costs make it harder for employers—especially small and mid-sized businesses—to offer competitive benefits without sacrificing profits.

Traditional employer-sponsored health insurance has been the go-to option for decades, but many employers are now looking for more cost-effective alternatives. One such solution is a Section 125 Plan (also known as a Cafeteria Plan), which provides pre-tax savings for both employees and employers.

So, how does a Section 125 Plan compare to traditional benefits? And which one is better for your business? Let’s break it down.

What Is a Section 125 Plan?

A Section 125 Plan allows employees to pay for health insurance premiums, medical expenses, and dependent care costs with pre-tax dollars. This reduces their taxable income and increases their take-home pay—all while helping employers save on payroll taxes.

Types of Section 125 Plans

✅ Premium Only Plan (POP): Employees pay health insurance premiums with pre-tax earnings.
✅ Flexible Spending Account (FSA): Employees set aside pre-tax dollars for medical and childcare expenses.
✅ Full Cafeteria Plan: Offers a menu of pre-tax benefits, including health insurance, dental, vision, and dependent care.

💡 Key Benefit: A Section 125 Plan doesn’t replace health insurance—it enhances it by making benefits more affordable for employees while lowering employer tax liability.

Section 125 Plan vs. Traditional Health Benefits: A Side-by-Side Comparison

📌 Bottom Line: A Section 125 Plan allows employees to keep more of their paycheck while helping employers cut costs—a win-win solution.

The Cost-Saving Benefits of a Section 125 Plan

A Section 125 Plan saves money for both employers and employees by reducing taxable income.

For Employers:

✔️ Save 7.65% in payroll taxes (FICA savings) on every pre-tax dollar contributed
✔️ Reduce overall payroll costs without cutting employee benefits
✔️ Attract & retain top talent without increasing expenses
✔️ Improve employee satisfaction with higher take-home pay

For Employees:

✔️ Pay less in taxes, keeping more of their salary
✔️ Lower healthcare costs with pre-tax premium payments
✔️ Increase take-home pay without needing a raise
✔️ Use tax-free dollars for medical & dependent care expenses

💡 Example Savings:
A company with 50 employees, each contributing $3,000 per year pre-tax, can save over $11,000 annually in payroll taxes alone!

Common Concerns About Section 125 Plans—Debunked!

❌ “It’s complicated to set up.”
✅ False. A Section 125 Plan is easy to implement, and providers like The Policy Shop handle the setup and compliance.

❌ “It limits employee benefits.”
✅ False. A Section 125 Plan actually enhances benefits by making them more affordable for employees.

❌ “It’s only for big companies.”
✅ False. Businesses of all sizes can benefit, and small businesses especially enjoy cost savings with lower payroll taxes.

❌ “It’s risky or non-compliant.”
✅ False. When properly administered, Section 125 Plans are fully IRS-compliant and follow IRS regulations.

Why Employers Should Switch to a Section 125 Plan Now

With healthcare costs rising, employers need a way to offer affordable benefits without sacrificing business growth. A Section 125 Plan is the best-kept secret for reducing costs while enhancing benefits.

✅ Slash payroll taxes & boost savings
✅ Give employees more take-home pay
✅ Stay competitive without raising costs
✅ Easy to implement & maintain

📞 Want to learn more? Contact The Policy Shop today to set up your Section 125 Plan!