Cafeteria Plan (Section 125) for Small Business — The Complete Setup Guide

Section 125 cafeteria plans are not just for large employers. The minimum threshold is 10 W-2 employees earning $25K+/year, which puts the program inside the reach of most small businesses with a full-time staff. The economics work cleanly at small scale: 10 employees nets $6,816/year, 25 employees nets $17,040/year, 50 employees nets $34,080/year — all in net employer FICA savings after the program's admin fee.

The administrative burden is also small: the plan administrator handles documentation, nondiscrimination testing, and ongoing compliance. Your role is mostly the initial signoff and an annual confirmation that headcount and eligibility data are accurate.

Setup for a small business runs the same 6–8 weeks as for a larger employer. The plan administrator drafts the plan document, integrates with your payroll provider (ADP RUN, Gusto, Paychex, Rippling, QuickBooks Payroll, etc.), prepares employee enrollment materials, and runs the first nondiscrimination test. Your business operates exactly as it does today during setup. The first payroll cycle after go-live reflects the FICA reduction; Workers' Comp adjusts at your next policy renewal cycle.

How the math works (in 90 seconds)

For every enrolled W-2 employee earning $25,000+/year and covered under an ACA-compliant group health plan:

• Pre-tax salary reduction: $1,200/month · $14,400/year
• Employer FICA savings (7.65%): $1,101.60/year
• Less program admin fee ($35/mo): −$420/year
• Net employer savings: $681.60/employee/year
• Employee net take-home raise: +$71.96/paycheck (~$863/year)
• Workers' Comp reduction: 30–60% real-world at next audit cycle (because WC base = taxable payroll, which Section 125 reduces by definition)

A 50-employee company nets $34,080/year in net FICA + industry-specific WC reduction. Run the calculator → for your specific number.

Verified compliant — May 2025 + August 2025

The Section 125 Preventive Care program described above was independently reviewed in 2025 by:

• HitesmanLaw P.A. (May 5, 2025) — 8-page formal legal opinion from Darcy L. Hitesman, J.D., a Super Lawyer-rated ERISA attorney with 35+ years in IRC § 125 practice, AV-rated since 1998, co-author of the national ERISA compliance manual. Concludes the program "satisfies applicable IRS requirements."
• CBIZ Advisors LLC (August 22, 2025) — top-7 U.S. accounting firm, 135,000+ clients. Independent review confirms compliance with IRC §§ 125, 105, 106, ERISA, ACA, and COBRA when operated per its provisions.
• $500,000 insurance-backed legal protection per enrolled employer + $10,000 per employee participant.

Read the full compliance authority page → · IRS.gov — Cafeteria Plans (Section 125) · 26 U.S. Code § 125

A real result from a real company

Maaco San Diego — 20-year franchisee Peter Capdevielle confirmed at audit · referred 26 other Maaco owners after his enrollment — saves 50%+ Workers' Comp reduction through this exact program structure. Read the full case study →

This isn't a projection — it's reported, on the public record, from operators whose own CPAs and attorneys reviewed the documentation before signing. Browse the full case study set →

How to verify it yourself

Three primary sources, all public:

1. IRS.gov — Cafeteria Plans — the law in the IRS's own words.
2. 26 U.S. Code § 125 — the federal statute itself.
3. The Hitesman opinion + CBIZ review — both share-able PDFs, available on your free 15-minute analysis call.

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