Cut Payroll Taxes
by Up to 7.65%
On Every Pre-Tax Dollar
It is not a gimmick or a loophole. It is Section 125 — a piece of the tax code from 1978 that most companies never fully use. The math is straightforward; most CFOs just have not been walked through it.
IRS Authority
Section 125 Cafeteria Plans: The Numbers
26 U.S.C. § 125
The IRS statute that lets employees pay for qualified benefits with pre-tax dollars. Been on the books since 1978.
View Statute
7.65% FICA Savings
The combined Social Security and Medicare tax your company pays on every payroll dollar. Pre-tax benefits skip it. Source: Social Security Administration.
View COLA Rates
Savings Scenarios
Estimated Annual Employer FICA Savings
50 Employees
Annual employer FICA savings on pre-tax health insurance deductions
Based on average salary $45,000 and 75% participation rate
200 Employees
Annual employer FICA savings on pre-tax health insurance deductions
Based on average salary $50,000 and 75% participation rate
500 Employees
Annual employer FICA savings on pre-tax health insurance deductions
Based on average salary $52,000 and 75% participation rate
Process
How Section 125 Works
Set Up the Plan
A one-time plan document gets signed. It lists which benefits employees can pay for pre-tax — health premiums, FSAs, dependent care, supplemental coverage.
Employees Choose Their Benefits
At enrollment, employees decide which qualified benefits to pay for with pre-tax dollars. Payroll handles the deductions automatically after that.
The Company and the Employee Both Save
Every pre-tax dollar skips the 7.65% payroll tax — for the business and for the employee. Same benefits, same coverage, lower tax bill on both sides.
Compliance
CFO Questions Answered
Is This Legal?
Yes. Section 125 of the Internal Revenue Code explicitly authorizes cafeteria plans that allow employees to make pre-tax benefit elections. This is one of the most established tax-advantaged benefit structures in existence.
IRS-approved and widely used
What is the Compliance Risk?
Low, when the plan is set up correctly. There are two things the IRS wants: a written plan document, and annual testing to confirm the plan does not favor highly compensated employees. A third-party administrator handles both. Most of the risk we see in the wild comes from companies running pre-tax deductions without a written plan — not from Section 125 itself.
Proper setup = low risk
What Does Implementation Cost?
Setup is typically $0 to $500, one time, depending on what your payroll provider already supports. Ongoing third-party administration fees are usually paid from the tax savings themselves — the plan pays for itself in the first quarter at most company sizes. Payback period and cost breakdown vary by headcount; we can walk through your scenario.
Usually pays for itself in quarter one
Want the real numbers for your company?
A 15-minute conversation with a licensed benefits professional. Bring your headcount and average salary — we will model the potential FICA savings, payback period, and total-benefits view for your situation. No hard sell.
Talk to DavidEducational Content Only: The information provided on benefitsgenius.co is for educational and informational purposes only. It does not constitute insurance, tax, legal, or financial advice. Consult with qualified professionals regarding your specific situation.
Ready to see how much your company could save?
Connect with David Toves for a free, no-obligation consultation — or ask Sarah a quick question anytime.
