modern employee benefits

Running a business isn’t cheap—especially when you’re trying to offer great benefits while managing tight margins. Between rising healthcare costs and the pressure to stay competitive in today’s job market, employers need benefit solutions that deliver real value without draining the budget.

Enter the Section 125 cafeteria plan—a powerful, IRS-approved way to offer pre-tax benefits that save money for both you and your employees.

Let’s break it down in simple terms: what it is, how it works, and why it might be the best benefit you haven’t implemented yet. (What Is a Section 125 Cafeteria Plan? And Why Smart Employers Use One | The plan saves employers & employees money through pre-tax benefits.)

What Is a Section 125 Plan | Cafeteria Plan?

A Section 125 plan, also known as a cafeteria plan, is a tax-advantaged benefit program that allows employees to pay for eligible expenses—like health insurance premiums, dental care, or medical copays—using pre-tax dollars.

Instead of paying for these costs out-of-pocket after taxes, employees can deduct the amount directly from their paycheck before taxes are calculated. This lowers their taxable income—and your payroll tax liability as the employer.

How Section 125 Plans Work (Without the Jargon)

The concept is simple: under IRS Code Section 125, employees can “choose” between taxable income and certain non-taxable benefits—hence the term cafeteria plan.

Employees select from a menu of options, which may include:

Health insurance premiums

Dental and vision coverage

Dependent care assistance

Health savings accounts (HSAs) or flexible spending accounts (FSAs)

Supplemental benefits like accident or critical illness coverage

By opting in, employees use pre-tax dollars, reducing their taxable income. Employers also benefit by lowering FICA tax obligations, making it a win-win.

📖 Learn more directly from the IRS cafeteria plan overview.

Why Employers Should Care About Pre-Tax Benefits

Offering a Section 125 plan isn’t just a nice perk—it’s a strategic move.

✅ Tax Savings for Employers

Every dollar shifted into pre-tax benefits reduces your payroll tax liability. Employers typically save around 7.65% in FICA taxes on each dollar of employee contributions.

✅ Boosted Take-Home Pay for Employees

Employees keep more of their earnings, which boosts morale and financial wellness without requiring you to raise salaries.

✅ Stronger Recruitment & Retention

Modern employees expect smarter benefits. A Section 125 plan shows your company is forward-thinking and values its people.

Our Section 125 Benefit Solution: The Champ Plan

If you’re looking for a turnkey, compliant way to implement a Section 125 plan, check out our Section 125 benefit solution: The Champ Plan.

It’s a fully managed program that includes:

Medical reimbursement benefits

IRS-compliant documentation

Minimal employer admin

Built-in wellness perks

Seamless employee enrollment and support

And best of all? It’s budget-friendly and scalable—even for small businesses.

Real Benefits You Can See Month-by-Month

Here’s how a Section 125 plan helps reduce taxable income on a monthly basis:

📊 Infographic Idea: Timeline of how a Section 125 plan reduces taxable income month-by-month.

Example: One Employee, $400 Pre-Tax Deduction

Employee gross pay: $4,000

Pre-tax benefits elected (Section 125): $400

Taxable income: $3,600

Employer saves ~7.65% in payroll taxes on $400 = $30.60/month

Multiply that across 20 employees and you’re saving over $7,000/year—without cutting checks or raising salaries.

5 Big Reasons Employers Are Adding Section 125 Plans in 2025

1. Tax relief for both sides of the paycheck

2. No disruption to existing health insurance or benefit programs

3. Boosted employee satisfaction through higher take-home pay

4. Improved recruitment messaging for job listings

5. Simple compliance with IRS rules when implemented properly

In short: it’s one of the few benefits that actually pays for itself.

FAQs About Section 125 Plans

❓ What expenses qualify under a Section 125 plan?

Eligible expenses include health insurance premiums, dental and vision coverage, FSAs, HSAs, and dependent care assistance. Some plans can also include supplemental benefits.

❓ Who can participate?

Generally, all full-time employees can participate. Some restrictions apply for owners or highly compensated employees, depending on plan design.

❓ Do employers save money too?

Yes—employers typically save 7.65% in payroll taxes on every dollar contributed to the plan. It’s one of the most cost-effective benefits available.

Final Thoughts: Make Smarter Benefits a Reality

In a world where benefit costs are climbing and employee expectations are rising, a Section 125 plan offers rare alignment: lower costs, higher value, and simplicity.

Whether you’re a company of 5 or 500, this strategy can free up budget, boost employee satisfaction, and differentiate you from competitors.

✅ Schedule a free benefits consultation with The Policy Shop today

Let us show you how our Section 125 benefit solution can fit your team and your goals—with no hassle and maximum return.