Download and Print a PDF of This Page

Section 125 Plans

Section 125 PlansSection 125 Plans

Section 125 plans allow employees to pay certain qualified insurance premiums with pre-tax dollars. This can result in savings of 20% to 40% or more, depending on the participant’s tax bracket and the premiums selected. In addition, employees can avoid tax on income used to pay for medical and child care.



The three basic forms of Section 125 plans are:

Premium Only Plan
The Premium Only Plan is the most basic type of Section 125 plan and the most popular. A Premium Only Plan allows employees to pay their portion of insurance premiums with pre-tax dollars, which in turn reduces both the employer’s and employee’s tax liability.  Benefits that are typically offered within a Premium Only Plan include:  health, dental, vision, accidental death and dismemberment, and group term life insurance up to $50,000.

Flexible Spending Account
Under IRC Section 125, employees may make pre-tax contributions to a Flexible Spending Account.  An employee may seek reimbursement from the Flexible Spending Account for expenses paid for child care, deductibles, and eligible medical expenses not otherwise covered under a health insurance plan.  A Flexible Spending Account allows an employee to increase his or her spendable income while also reducing the employer’s tax liability.

Full Cafeteria Plan
Under a Full Cafeteria Plan, the employer makes a non-elective contribution for every eligible employee.  The employees may spend the employer contribution to purchase any of the benefits offered within the Cafeteria Plan.  In addition, the employee may contribute pre-tax dollars to purchase additional benefits beyond what he or she can purchase with the employer’s contribution.


In addition to helping you select and design a plan for your company, we can develop administrative procedures that make it easier for you to:

  • Prepare required IRS forms.
  • Develop dependent care and medical reimbursement accounting processes.
  • Answer employee questions.