Section 125 Plan

A Section 125 plan, also known as a cafeteria plan, is a powerful tool that allows businesses to offer pre-tax benefits to employees—helping both employers and employees save on taxes. At The Policy Shop, we handle the entire setup process for you, ensuring compliance and maximum savings.

Step 1: Determine Business Eligibility

Before setting up a Section 125 plan, we verify that your business qualifies. Employers of all sizes—including corporations, partnerships, LLCs, and sole proprietors with employees—can establish a Section 125 plan. However, self-employed individuals without W-2 employees are generally ineligible.

Who Can Participate?

Full-time employees

Part-time employees (if specified in the plan)

Business owners (if they receive W-2 wages)

Step 2: Choose the Right Section 125 Plan Type

There are different variations of Section 125 plans, each designed to serve specific business needs. The Policy Shop will help you select the best option for your company.

Common Section 125 Plan Options:

✅ Premium Only Plan (POP): Allows employees to pay for health insurance premiums with pre-tax dollars.
✅ Full Cafeteria Plan: Provides a selection of pre-tax benefits, including medical, dental, vision, and dependent care.
✅ Flexible Spending Account (FSA): Lets employees set aside pre-tax income for eligible medical and dependent care expenses.
✅ Health Savings Account (HSA): Works alongside high-deductible health plans to offer tax-free savings for medical expenses.

Step 3: Draft a Section 125 Plan Document

The Internal Revenue Service (IRS) requires businesses to have a written Section 125 Plan Document outlining:

Employee eligibility criteria

Benefits offered under the plan

Rules for enrollment and changes (e.g., qualifying life events)

Compliance with IRS regulations

To ensure legal compliance and avoid penalties, The Policy Shop will draft and customize this document for your business.

Step 4: Establish Payroll Deductions for Pre-Tax Contributions

Once the plan is in place, The Policy Shop will coordinate with your payroll provider to adjust employee withholdings for pre-tax deductions. This ensures that contributions to health insurance premiums, FSAs, or HSAs are deducted correctly.

Pro Tip:

Partnering with an experienced payroll provider or benefits administrator, like The Policy Shop, simplifies deductions and helps maintain compliance.

Step 5: Communicate the Benefits to Employees

A Section 125 plan only works if employees understand and take advantage of it. The Policy Shop provides:

Employee meetings/webinars to explain tax savings

Easy-to-read benefits guides detailing available options

Email reminders and HR support to encourage enrollment

If you need assistance in educating your workforce, The Policy Shop is here to help!

Step 6: Enroll Employees & Maintain Compliance

We handle the administrative process, ensuring:

Employees complete the necessary paperwork for pre-tax deductions.

Open enrollment periods are properly set up.

Compliance with IRS nondiscrimination rules, ensuring benefits are fairly offered across employee groups.

Step 7: Review & Update the Plan Annually

Tax laws and benefits change over time. The Policy Shop will review and update your Section 125 plan each year to:

Ensure ongoing IRS compliance

Optimize your business’s tax advantages

Keep your benefits competitive

Start Saving with a Section 125 Plan Today!

Setting up a Section 125 plan doesn’t have to be complicated. The Policy Shop will handle everything for you—from eligibility checks to employee enrollment—so you can focus on running your business.

Need help getting started?

Contact The Policy Shop today to implement the right Section 125 plan for your business and start saving!