What Is a Section 125 Plan, and How Does It Lower Payroll Tax?

A Section 125 plan, often called a cafeteria plan, is a written plan under Section 125 of the Internal Revenue Code that lets employees pay for qualified benefits out of their pay before tax. Because those dollars leave pay before payroll tax is calculated, the employer has less payroll to tax from the plan's start date forward.

How does it lower payroll tax?

Employers pay 7.65% in FICA on wages: 6.2% for Social Security, up to the annual wage base, and 1.45% for Medicare. Pre-tax premiums paid through a Section 125 plan are generally not FICA wages, so the employer's 7.65% share is calculated on a smaller number. The employee's own withholding falls in the same way.

Quantum 125, the program Longtable Benefits offers with Quantum Health Benefits, puts a fully insured supplemental health plan inside that structure. The program is designed so the company saves about $957 a year per enrolled employee and each enrolled employee takes home about $85.48 more a month on a $50,000 salary. Those are the program's design figures, not a quote or a guarantee; your own payroll report sets your figures.

What do employees get?

On Plan 1500: telemedicine around the clock at $0 copay for the family, $0 copay on 1,000+ covered medications, hospital, ER, ambulance, surgery and anesthesia benefits, a critical illness lump sum and accident coverage, plus a virtual vet and coaching sessions.

Not major medical insurance; benefits vary by plan and state; see plan documents.

How does enrollment work?

Every eligible employee starts enrolled, so the plan begins at 100% participation. Each employee gets written notice of the plan and the payroll deduction and can choose to opt out. Quantum 125 employers typically see 86–92% participation.

What does your CPA review?

The proposal, the Section 125 plan document and the payroll reporting instructions, before anything is signed. Longtable Benefits does not give tax or legal advice; the plan documents and your own advisors decide how the plan applies to your company.

Is it a fit?

It fits employers with regular W-2 payrolls, hourly or salaried, especially those with 100 to 1,000 employees. It does not fit a workforce of 1099 contractors. Start by looking up your company's Form 5500 filing to see the program's design figures at your headcount.