What if you could lower your health insurance costs and increase your employees' take-home pay—all without giving raises?

Good news: You can. Section 125 Premium Only Plans (POP) are a powerful, tax-advantaged tool that can help small business owners and employees alike keep more of their hard-earned money.

Let’s break down how these plans work, why they’re a win-win, and how you can implement one in your business—without breaking the bank or losing sleep over compliance.

What’s a Section 125 Plan?

Also known as a Cafeteria Plan, a Section 125 POP allows employees to pay for benefits like health insurance premiums using pretax dollars. It’s called a "cafeteria" plan because employees can pick and choose the benefits that suit their needs best.

The big takeaway? These contributions reduce the employee’s taxable income, meaning they take home more money. And since the contributions aren't taxed, you as the employer save on payroll taxes, too.

How Employees Benefit

• More take-home pay: Since their premiums are deducted before taxes, employees owe less in federal, Social Security, and Medicare taxes.
  
  
• Flexible options: Employees can apply pretax dollars to a range of benefits—health insurance, dependent care FSAs, HSAs, and even commuter benefits.
  
  
• Custom-fit coverage: Everyone’s needs are different. Section 125 plans give employees the freedom to choose what’s right for them.
  
  

Example:
An employee earning $50,000 who pays $2,000 toward health insurance pretax would only be taxed on $48,000—saving hundreds annually.

Why Employers Love Section 125 Plans

• Save on payroll taxes: You don’t pay Social Security or Medicare taxes on the employee contributions.
  
  
• Boost recruitment & retention: Offering tax-savvy benefits makes your company more competitive and shows employees you’re invested in their well-being.
  
  
• Affordable compliance tools: With the right tools in place, administering a plan doesn’t have to be complicated or costly.
  
  

The Tax Advantages at a Glance

• ✅ Federal Income Tax: Employee contributions are exempt.
  
  
• ✅ FICA (Social Security & Medicare): Both you and your employees save.
  
  
• ✅ Federal Unemployment Tax (FUTA): Employer contributions may be exempt.
  
  
• ⚠️ State Taxes: Varies by state—always check with a tax advisor.
  
  

Setting Up a Section 125 Plan: What You Need

1. Health insurance policy from a licensed broker.
   
   
2. A formal plan document outlining rules, eligibility, and benefits.
   
   
3. Salary reduction agreements for participating employees.
   
   
4. An understanding of nondiscrimination rules—the plan must be fair to all employees, not just the higher earners.
   
   

What to Watch Out For

• “Use it or lose it” rules apply to FSAs—any unused funds may be forfeited at year-end.
  
  
• Mid-year changes are only allowed with a qualifying life event (e.g., marriage, birth, etc.).
  
  
• Compliance is key—proper documentation is non-negotiable if you want to avoid penalties.
  
  

Don’t Go It Alone—We’re Here to Help

At ConnectPay, we don’t sell health insurance, but we do make Section 125 compliance easy with our new solution: Connect Section 125.

Already working with a broker? Great. We’ll help you create and manage your required plan documents through our simple portal—ensuring your business stays compliant year-round.

Need a referral to a local broker? We’ve got you covered there too.

Section 125 plans are an underrated tool that can make a big impact. If you're looking to offer smarter benefits without blowing your budget, it's time to explore this option.

Ready to start saving? Let’s talk.