A Section 125 Plan provides the option for employees to select certain benefits normally paid for on an after-tax basis and, through salary reduction, pay for these benefits on a pre-tax basis. The result is tax savings for an employer and employees.
Companies of any size are all eligible for Section 125 plans. Once a Section 125 Plan is in place, any employee who satisfies the eligibility criteria can participate. The eligibility requirements are set by the employer and may be based on age or years of services.
The chief benefit for both the employer and employees under a Section 125 plan is paying for medical expenses with tax-free dollars. An employer saves 7.65 % (FICA) on every dollar that an employee runs through a 125 plan. An employee saves FICA, Federal, and State taxes on every dollar they run through a Section 125 plan, which is close to 30%.