The simplest cafeteria plan lets employees pay their share of premiums before tax.
A premium-only plan is a Section 125 plan whose only choice is paying premiums before tax or after. It costs employers little to run, saves payroll tax on both sides, and has to be in place on paper before it is used.
One election, one set of savings.
Employees choose to pay their share of qualifying premiums from pay before federal income and payroll taxes.
Employee Savings
Premiums paid through the plan are not subject to federal income tax or Social Security and Medicare tax, and in most states income tax as well. The savings grow with the premium.
Employer Savings
The employer doesn’t pay its share of Social Security and Medicare tax on the amounts employees divert. The savings often exceed the cost of administering the plan.
What Qualifies
Employee contributions toward the group health, dental and vision premiums, and many voluntary benefit premiums when the plan is written to include them.
Written first, elections locked in.
Section 125 and its regulations set the conditions.
A Written Plan
The plan has to be written and adopted, with its terms spelled out, before it takes effect. A plan that exists only in practice does not get the tax treatment.
Elections Stick
Employees make their election before the plan year begins and can change it mid-year only after a qualifying change, such as marriage, birth or loss of coverage, consistent with the plan terms.
Who Is Out
Sole proprietors, partners and two percent S corporation shareholders can’t pay premiums pre-tax through the plan. The plan also has to pass eligibility, contributions and benefits tests, and a test for benefits concentrated in key employees.
A POP is the base, not the ceiling.
Many employers start here and add accounts later.
Add a Health FSA
The same plan document can offer a health flexible spending account, which brings extra tax savings and more rules.
Add Dependent Care
A dependent care account can be added under the same plan, subject to its own limits and nondiscrimination rules.
Check Your Plan Today
Many employers have a plan document that is out of date or was never signed. A review costs little compared to losing the tax treatment.
What employers ask about premium-only plans.
Do we need a plan document if everyone has pre-tax premiums?
Yes. Without a written plan the premiums are taxable. The document is short and can be adopted by the employer.
Can we start mid-year?
The plan can be effective on a date you choose, but it can’t be applied to pay before it is adopted, and elections must be made before the pay they affect.
Does it cost us anything?
Mostly a document and some payroll setup. We are happy to review what you have and tell you what is missing.
Related guides.
Section 125 Cafeteria Plans
The full plan, with accounts.
Cafeteria Plan Documents
What the written plan must contain.
Section 125 Tax Savings Calculator
Estimate what the plan saves.
Tell us what your payroll does today.
We’ll tell you whether you have a valid plan, what it would save, and what it needs. No cost, and no obligation.
Your current plan document, if any
Your payroll system
Which premiums employees pay
Number of employees
Rough answers are fine. We build the numbers from there.
Laws and rules referenced
26 U.S.C. § 125 — Cafeteria plans: written plan requirement, permitted benefits and nondiscrimination.
26 CFR 1.125-1 — Cafeteria plan rules, elections and plan requirements.
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