Section 125 tax savings calculator: what does paying premiums before tax save?
Enter the employee premium, the number of participating employees and the tax rates to see the savings for each employee and for the employer. Built for owners and HR teams deciding whether a cafeteria plan is worth setting up.
Estimate the savings from a premium-only plan.
Use your own numbers. The result updates as you type.
The employee share for the coverage the employee has.
The employee’s marginal rate.
Enter your state rate, or zero if none.
Your savings
A planning estimate, not tax advice. It uses the 7.65 percent employer and employee FICA rate and ignores local taxes and the Social Security wage base. Confirm with your tax advisor.
How does a premium-only plan save tax?
Under Section 125 of the tax code, an employer can let employees pay their share of health premiums from pay before income tax and payroll tax are figured. The employee pays less tax on the same salary. Why employer-paid coverage is tax-free to employees is covered in our owner tax guides. The employer pays less payroll tax too, because FICA applies to a smaller wage base. For many small employers the employer savings alone cover the cost of setting up the plan.
What does the employer have to do?
The employer has to adopt a written cafeteria plan document, offer the same choice to eligible employees and keep the plan from favoring owners and highly compensated staff. Owners with more than a 2 percent stake in an S corporation cannot take part in the plan as employees, and partners and sole proprietors generally cannot either. How each type of owner is taxed on their own premiums is covered in our owner tax guide. We help employers set up Section 125 plans and keep them compliant.
Common questions
Is the Social Security wage base an issue?
Yes. The 6.2 percent Social Security part of FICA stops at the wage base, so higher earners save less on that part. The estimate here applies the full 7.65 percent, which fits employees below the wage base.
Do employees lose Social Security benefits?
Paying premiums pretax lowers wages for Social Security purposes slightly. For most employees the effect on a later benefit is small. An employee near retirement should ask an advisor. Owners can estimate their own savings with the Owner Health Insurance Tax Savings Estimator.
Can employees change their election mid-year?
Only for a qualifying life event, under the plan’s rules. See our guide on qualifying life events and mid-year changes.
Does this cover HSAs and FSAs?
A cafeteria plan is also the vehicle for health FSAs and dependent care accounts. This tool looks at the premium part only.
Laws and rules referenced
26 U.S.C. § 125 — Cafeteria plans: pre-tax premium payments, plan limits and nondiscrimination rules.
26 U.S.C. § 3121(a)(5)(G) — Cafeteria plan benefits are excluded from Social Security and Medicare (FICA) wages.
IRS Publication 15-B — Employer’s tax guide to fringe benefits, including cafeteria plan and transportation benefit rules.
This tool gives estimates for education, not tax or legal advice. Rules change, so confirm your situation with a qualified advisor.
Talk to us about a Section 125 plan
Book a 30-minute call and we will check whether a plan fits, what it saves and what it takes to keep it compliant. Visit us at 41000 Woodward Avenue, Suite 350 East, Bloomfield Hills, MI 48304, or call 248.370.8853.
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