Section 125 + COBRA Interaction — Continuation Coverage

COBRA continuation rules apply to the underlying group health insurance components running through Section 125, not to the Preventive Care wellness reward (which is tied to active employment). CBIZ's August 2025 review specifically confirmed COBRA compliance.

Here's the deeper detail — including the underlying authority, the practical implications, and what it means for your specific situation.

Most Section 125 questions follow a similar pattern: there's a federal statutory answer (often well-settled and decades old), a practical operational answer (handled by your plan administrator), and an employer-specific answer (returned by the free 15-minute analysis call with the tax specialist). The Preventive Care variant we work with is structured to give clean answers across all three.

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
• 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

Golden Living Point Loma — 51-employee San Diego assisted living facility · owner is a practicing attorney who read the IRS codes himself — saves $120,000/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 COBRA interacts with Section 125 elections

COBRA continuation coverage under IRC § 4980B and ERISA § 601 applies to employers with 20 or more employees on more than 50% of typical business days in the prior calendar year. When a qualifying event triggers COBRA (employment termination, hours reduction, divorce, dependent loss of eligibility, etc.), the affected individual has the right to elect continuation coverage at their own cost for a defined period (typically 18–36 months depending on the qualifying event).

The Section 125 specific interactions with COBRA:

• Group health continuation. The COBRA-continued coverage runs through the underlying group health plan, not through the § 125 cafeteria plan. The § 125 salary reduction stops at termination because there are no wages to reduce.
• FSA continuation (if applicable). For § 125 plans that include a Health FSA component, COBRA continuation rights apply to the FSA balance for the remainder of the plan year. The COBRA-electing individual pays for FSA continuation on a post-tax basis (since they have no wages from the employer to apply pre-tax salary reduction against).
• Qualifying events under § 1.125-4. COBRA-triggering events are also qualifying events for § 125 election changes. Active employees experiencing a qualifying event (e.g., a dependent aging out of coverage) can change their § 125 election within 30 days to be consistent with the change.

For operators below the 20-employee COBRA threshold: federal COBRA does not apply, but state-level "mini-COBRA" laws (Cal-COBRA in California, similar statutes in other states) often impose continuation requirements with similar mechanics. The plan administrator coordinates COBRA notices and elections under the plan's standard administrative procedures.

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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