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Why Should I Take Advantage of a Section 125 Plan?

Employee Benefits

With increasing health-care costs, offering a section 125 plan can not only help augment your employee benefit package, but it also offers certain employer and employee tax advantages.

How Does a Section 125 Plan Work?

According to the IRS, a section 125 plan or "cafeteria plan" provides employees with an opportunity to receive certain benefits on a pre-tax basis. This money is taken out of the individual's gross pay and can be used for items such as group health insurance premiums, qualified out of pocket medical expenses, and day care for eligible dependents.

Under a section 125 plan, employers also see a reduction in the amount of income used to determine payroll taxes, and experience a reduction in tax liabilities for Medicare, Social Security, and unemployment. There may also be additional savings on state withholding taxes, however, this does not apply to the state of New Jersey.

How Do I Start a Section 125 Plan?

Setting up a Paychex Flexible Spending Account (FSA) is a convenient way for employees to save pre-tax dollars for certain medical and dependent-care costs such as prescription drugs, co-pays and deductibles, and day care. Paychex also offers a debit card that makes it easier for employees to use their FSA money for eligible items.

A Premium Only Plan (POP) is included in the purchase of an FSA. This is another great way to save on insurance premiums with pre-tax dollars contributing to the overall cost. In combination with group health insurance, a POP reduces taxable income and results in a reduction in the amount used to determine your FICA and FUTA payroll taxes, and any applicable state taxes.

How Can Paychex Help?

Paychex will support you by providing assistance with: setting up enrollment, answering employee questions, record keeping, compliance testing, and status reports.


To learn more about how you can help employees pay for health care, download this free whitepaper.

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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