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Section 125?



What Is Section 125?

Section 125 is an IRS approved way for employers and their employees to change and personalize their benefits while controlling plan costs.  Employees can use pre-tax dollars to pay for certain benefits , thus reducing their taxable income and taxes.
Without new money being involved, an employer is able to update benefits, improve employee morale and, in most cases, reduce social security and worker's compensation contributions.

How It Works

Without a Section 125 plan, employees pay for their portion of employee benefit costs with dollars they have already paid taxes on (after tax dollars).  With a 125 plan, employees can pay most of these costs with pre-tax dollars.

Immediate Tax Savings

Employee contributions to the 125 plan lowers wages subject to federal income tax.  This produces an immediate income tax savings.  In most cases state and local income taxes, as well as employee social security taxes are reduced.


Every business with non-owner employees qualifies.  Every governmental body and most private nonprofit organizations can also have a 125 plan.

Sole proprietors and most partners in a partnership are excluded, as well as 2% or more shareholders in an S-Corp.  All employees other than self-employed persons qualify.

Social Security Benefits Impact

Since reducing taxable wages means a reduced social security tax, future social security benefits may decline.  For this reason, it is recommended that the participants' tax savings be transferred to a savings or investment plan.  Typically the savings or investment plan will provide from five to ten times the retirement income of the reduction in social security.
Benefit Consulting, Inc. works with a number of companies capable of facilitating a savings or investment plan.

Section 125 plans may begin at any time.  Immediate employer action may mean significant savings since participating employers usually save 10% of the amount of payroll reallocated to a 125 plan.


Send mail to info@benefitconsultinginc.com with questions or comments about this web site.
Last modified: December 18, 2010