An IRS code provision allowing employees to choose between taxable cash compensation and non-taxable qualified benefits. Section 125 plans reduce FICA liability for both the employer and employee on all pre-tax benefit elections.
Why Section 125 Cafeteria Plan matters for employers
Without a Section 125 plan, employees pay for benefits like health insurance premiums, dental, and vision out of after-tax wages, and both the employer and employee pay FICA on those amounts. A properly structured Section 125 plan allows these elections to be made pre-tax, saving the employee approximately 7.65% in FICA plus their marginal income tax rate, and saving the employer 7.65% in matching FICA on every benefit dollar elected pre-tax.
Section 125 plans must be maintained under a written plan document and can include health insurance, dental, vision, FSAs, and dependent care FSAs. Cafeteria plan elections are generally irrevocable for the plan year unless a qualifying change in status occurs (marriage, divorce, birth, loss of coverage). Employers must administer elections carefully to avoid constructive receipt issues.
How BEG handles Section 125 Cafeteria Plan for clients
BEG Managed Payroll handles Section 125 Cafeteria Plan as part of a fully managed payroll service at $25-$45 per employee per month. Clients do not need to track compliance rules, filing deadlines, or calculation methods related to Section 125 Cafeteria Plan on their own. Everything is included. Learn about BEG Managed Payroll.
Frequently asked questions
Do employers have to manage Section 125 Cafeteria Plan themselves?
No. A managed payroll provider handles Section 125 Cafeteria Plan as part of full-service payroll. BEG manages this for clients at $25-$45 PEPM with no system migration required.
What happens if Section 125 Cafeteria Plan is handled incorrectly?
Errors related to Section 125 Cafeteria Plan can trigger IRS penalties, state agency assessments, or employee disputes. Catching and correcting errors before filing is far less costly than after-the-fact corrections.
How does BEG handle Section 125 Cafeteria Plan for managed payroll clients?
BEG tracks, calculates, and remits everything related to Section 125 Cafeteria Plan as part of fully managed payroll. Clients do not need to monitor compliance -- that is included in the service at $25-$45 PEPM.
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About the author
Anthony Moretti is VP of Sales at Business Executive Group, where he builds BEG's managed payroll and HR service verticals for employers across Dallas-Fort Worth and nationwide. He writes the BEG Payroll Glossary to give employers plain-English answers on payroll and compliance.
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