Health Insurance — Section 125 Plan

Health insurance costs are rising year after year, making it increasingly difficult for employees to afford quality coverage. Many workers feel the financial strain of high premiums and out-of-pocket expenses, while employers struggle to offer competitive benefits. Fortunately, a Section 125 plan (also known as a cafeteria plan or pre-tax benefits plan) can provide significant relief by allowing employees to pay for health insurance and other qualified benefits with pre-tax dollars. This simple tax-saving strategy reduces taxable income, lowers payroll taxes for employers, and makes healthcare more affordable for everyone.

What is a Section 125 Plan?

A Section 125 plan is an employer-sponsored benefit program that allows employees to use pre-tax dollars to pay for certain benefits, including health insurance premiums, flexible spending accounts (FSA), and dependent care expenses. Because these contributions are made before taxes, both employees and employers benefit from reduced tax liability.

Key Benefits:

Employees pay less in taxes, increasing their take-home pay.

Employers save on payroll taxes, reducing overall labor costs.

Helps businesses attract and retain top talent with more competitive benefits.

For a more in-depth understanding, check out this Wikipedia article on Cafeteria Plans.

How a Section 125 Plan Lowers Health Insurance Costs

Reduces Taxable Income

When employees pay for health insurance premiums using pre-tax dollars, their taxable income is lowered, which means they pay less in federal, state, and FICA (Social Security and Medicare) taxes. For example, an employee earning $50,000 annually who pays $5,000 in health insurance premiums can reduce their taxable income to $45,000—resulting in substantial tax savings.

Helps Employers Save on Payroll Taxes

Since an employee’s taxable income is reduced, employers also pay less in payroll taxes (including Social Security and Medicare contributions). These savings can be reinvested into the business, allowing companies to offer even better benefits or offset rising healthcare costs.

Increases Employee Take-Home Pay

By reducing tax liability, a Section 125 plan allows employees to keep more of their hard-earned money. On average, employees can save 25-40% on their health insurance premiums compared to paying with post-tax income.

Works Alongside Flexible Spending Accounts (FSAs) & Health Savings Accounts (HSAs)

A Section 125 plan can also be structured to include Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs), allowing employees to set aside pre-tax dollars for out-of-pocket medical expenses. These accounts further enhance savings and provide more flexibility in managing healthcare costs.

• Learn more about FSAs

How The Policy Shop Can Help

Setting up a Section 125 plan can be complex, but The Policy Shop makes it easy. We work with businesses to design and implement customized pre-tax benefits solutions that maximize savings, ensure compliance with IRS regulations, and improve employee satisfaction.

Our Services Include: ✅ Personalized consultation to determine the best plan for your business ✅ Assistance in drafting required legal documents ✅ Seamless integration with payroll systems ✅ Employee education and enrollment support ✅ Ongoing compliance and annual plan reviews

With healthcare costs on the rise, businesses need every advantage to keep benefits affordable. A Section 125 plan is a smart, IRS-approved strategy that lowers tax burdens for both employers and employees, making health insurance significantly more affordable. If you’re ready to start saving, contact The Policy Shop today to implement a Section 125 plan tailored to your business!