Section 125 Plans

Section 125 plans provide a simple and effective way to add employee benefits, especially for businesses with a number of employees who regularly have medical and childcare expenses. Employees can deduct their insurance premiums pretax and set aside pretax funds to use toward qualified medical and dependent care expenses. With a section 125 flexible spending account, employees can save an average of 30% in federal, state, and local taxes on items they already pay out-of-pocket.

For business owners, this means decreased company payroll and tax liabilities for social security, Medicare, and unemployment. A section 125 flexible spending account can save employers an average of almost $115 per participant in FICA payroll taxes – which can offset or be more than what you paid to start the plan.

Flexible Spending Account (FSA)

An FSA helps pay for out-of-pocket medical, dental, and dependent care expenses that are not covered by other benefit plans.

    Expenses that typically qualify with an FSA include:

    • Prescription drugs
    • Over-the-counter items*
    • Co-pays and deductibles
    • Eyeglasses/contact lenses
    • Chiropractic care
    • Child/dependent care
    • Non-cosmetic dental procedures
    • Orthodontia
    • Acupuncture
    • Psychiatric care

    *A prescription is needed for over-the-counter medicines and drugs to be eligible for reimbursement under the health FSA.

    Dependent care expenses that typically qualify with an FSA include:

    • Care for a child under the age of 13
    • Care for a disabled spouse or dependent incapable of caring for him/herself
    • Household-related services (e.g., visiting nurse)

Premium Only Plan (POP)

Employees pay their share of health care insurance premiums using pretax dollars. Taxable income is reduced by the amount contributed, so employees withhold less for social security, federal and state and local liability. As a result, employees receive a larger net check and employers can potentially enjoy a tax reduction.

Comparing POP and FSA

Section 125 Plan Comparison POP FSA

Pretax premium payments

included N/A

Pretax payment of qualified expenses* not covered by your benefit plans

included included

Reduces employees’ FICA, federal, and where applicable, state and local taxes

included included

Reduces employers’ FICA payroll taxes by effectively lowering employee taxable income

included included

Can be integrated with Paychex Payroll for automated contribution deductions and simplified plan administration

included included

A powerful tax incentive to help recruit and retain quality employees

included included

Easy claim submission via secure website or mail

N/A included

Optional reimbursement methods:

  • Direct deposit
  • Check signing and mailing
  • Paychex FSA debit card
N/A included

Dedicated toll-free support line

included included

*Medical, dental, and dependent care expenses, including co-payments, deductibles, and some over-the-counter medications.