Cafeteria (Section 125) Plan — A Complete Guide for Employers

A cafeteria plan under Internal Revenue Code § 125 is a federal tax structure that lets W-2 employees pay for certain benefits with pre-tax dollars — meaning the cost of those benefits is excluded from taxable wages. It's been part of the U.S. tax code since 1978 and is the underlying authority for pre-tax health insurance, FSAs, dependent care, HSAs (when run through payroll), and the Preventive Care wellness program variant we work with at Section 125 Savings.

This guide walks through the full structure of a complete cafeteria plan: what's included, who qualifies, how the savings work mathematically, and what the modern Preventive Care variant adds on top of the standard pre-tax-health-insurance setup most employers already run.

Most employers operating today have a partial Section 125 plan — usually just the pre-tax health-insurance deduction. That captures a meaningful portion of the available tax savings, but it leaves the larger savings on the table. The complete Preventive Care variant adds a HIPAA-compliant participatory wellness program funded by an additional pre-tax salary reduction, with a post-tax wellness reward returning to the employee's paycheck. The result: the employer saves $681.60/W-2 employee/year (net of the program's $35/month admin fee), and the employee takes home ~$72 more per paycheck automatically. Both sides of the math are mechanical — published IRS rate × pre-tax reduction.

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

Black Tiger Transportation — 66 W-2 employees, Southern California medical transport, CEO is a CPA who reviewed every IRS code before signing — saves $140,000/year 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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