Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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The lowdown...

  • Section 125 is part of the IRS code that was created to make it easier and more affordable for employees to pay for their benefits
  • If your employer offers you a Section 125 program, employees have the option to pay their monthly premium towards their benefits before taxes are taken out of their paychecks
  • There are two types of Section 125 plans; a flexible spending account and premium only plans
  • Health coverage, prescription, dental, vision, disability, and several other benefits are all eligible to be part of a Section 125 plan

What is a Section 125 plan?


A Section 125 plan, also known as a cafeteria plan, is a plan that meets the guidelines set forth by Section 125 of the IRS code that some employers may offer to their employees. It allows taxable income, like an employees’ salary, to be used for a non-taxable qualified benefit such as health insurance.

Employees enrolled in this plan must have the option to choose between at least one taxable benefit, which would be cash in this case, and a nontaxable qualified benefit.

A qualified benefit must be exempt from inclusion in an employee’s gross income. The Section 125 plan must specifically outline the requirements associated with the program and what benefits are eligible.

If your employer is offering you the choice between two benefits that are taxable, it is not considered a Section 125 plan.

Benefits under Section 125 plans can be made eligible to employees and their dependents, as well as former employees in certain circumstances. The employee will receive a salary reduction in agreement with their employer who also makes a contribution to the plan.

Since the employee never actively sees this salary reduction, it is not subject to federal taxes and is usually not subject to FICA or FUTA as well.

Implementing a Section 125 plan can mean savings for both employees and employers. Some research has shown that with a Section 125 Flexible Spending Account, employees may save an average of 30 percent in taxes on benefits that they would be paying for regardless.

Additionally, employers can save close to $115 per employee on payroll taxes with a Section 125 flexible spending account.

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What benefits are eligible?


Benefits vary depending on the employer, insurance plan, and the regulations included in your Section 125 program.

Qualified benefits may include adoption assistance and dependent care assistance. Additionally, accident and health benefits can qualify, but not Archer medical savings accounts or long-term care insurance.

Prescription coverage, dental, vision, and hospital indemnity can all be considered a qualified benefit. Group term life insurance up to $50,000 can also qualify, as can disability coverage, although it is not recommended.

What is a flexible spending account?

A flexible spending account assists in paying for healthcare related expenses that may not have been covered by your basic healthcare plan. Some of these costs might be prescription and drug coverage. However, if you were planning on being reimbursed through your flexible spending account for any over the counter drugs you purchased, you will need a prescription showing their necessity.

You can also use your flexible spending account to help you pay for acupuncture, chiropractic care, and eyeglasses and lenses which may not be covered by your basic health insurance plan.

Dependent care can also qualify with your FSA account if you need care for a child under the age of 13, care for a spouse or other dependent who is disabled, or visiting nurse services.

Depending on the service you use to set up this account, employers can choose different plans that offer various services, such as plans that allow money to be carried over into the following year or plans with grace periods.

What is a premium-only plan?


A premium only plan means that employees can pay their health insurance premiums with money before it is taxed. Since taxable income is decreased when there is a smaller amount given towards it, employees save money on social security, as well as federal, state, and local income taxes.

Employers may also benefit from a tax reduction when implementing a premium only plan for their employees. Both premium only plans and flexible spending accounts can be beneficial for employee and employer and offer savings.

However, only premium only plans give employees the option to make pre-tax premium payments, while only flexible spending accounts utilize direct deposit and debit cards to make payment for services such as purchasing eyeglasses or paying for certain healthcare services much simpler and quicker.

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