Section 125 vs Giving Employees Raises — Which Actually Helps Both Sides?
By David Newman · Referral Partner, Section 125 Savings · San Pedro, CA
If you're considering a raise to retain employees, the math doesn't go where most owners think it goes. A traditional raise costs you the raise PLUS 7.65% employer FICA on the raise PLUS Workers' Comp premium on the higher payroll base. Section 125 delivers the same paycheck improvement to your employees — at zero net employer cost.
Side-by-side comparison
| Factor | Section 125 Preventive Care | Traditional Raise |
|---|---|---|
| Employee paycheck change | +$71.96 / pay period (~$863/yr) | Up to $100/pay period before tax |
| Employer cost (per employee, per year) | $0 net (after $681.60 FICA savings) | $1,000+ raise + 7.65% FICA + WC premium |
| Employer FICA savings | +$681.60/employee/year | −$76.50 to −$153/employee/year (more FICA) |
| Workers' Comp premium impact | Reduces 30–60% at next audit | Increases (higher payroll base) |
| Wellness benefits to employee | 24/7 telemedicine, free meds, dental, mental health | None |
| Setup time | 6–8 weeks | Immediate (next pay cycle) |
| Affects gross salary on offer letters | No | Yes (permanent base increase) |
| Reversible if business shifts | Yes (annual plan year boundary) | No (permanent) |
Why Section 125 Preventive Care wins for most operators
A 4% raise on a $50,000 employee is $2,000 in additional gross salary. The employer doesn't pay $2,000 — they pay $2,153 (the raise plus the 7.65% employer FICA on the raise) plus the Workers' Comp premium increase on the larger payroll base. For a 25-person operation with a 5% WC rate, the all-in cost of a $2,000/employee raise approaches $2,250/employee.
Section 125 Preventive Care delivers approximately $863/year of additional take-home pay to every participating W-2 employee — at zero net cost to the employer. The mechanism: $1,200/month of pre-tax salary reduction (which lowers FICA-taxable wages and triggers a $1,101.60/year FICA savings per employee), netted against the program's $35/month admin fee, leaves the employer with $681.60/year in net savings. The employee's tax withholding drops by ~$272/month and a post-tax wellness reward of ~$1,000/month flows into their paycheck.
The paycheck-improvement-per-dollar-of-employer-cost ratio is structurally different. Raise: $863 employee benefit / $2,250 employer cost = $0.38 of employee benefit per employer dollar. Section 125: $863 employee benefit / -$681.60 employer cost (negative — they save) = infinite ratio (employees benefit while employer saves).
There are reasons to give a raise — promotion, market correction, recognition. There are no reasons to give a raise as a benefits substitute when Section 125 exists.
Can they coexist?
Section 125 and traditional raises are not mutually exclusive. Many operators implement Section 125 first (because it's structural and zero-cost), then later add merit raises with the savings. A 50-employee operator who saves $34,080/year in FICA via Section 125 can fund a $1,000/year merit raise pool of 25 top performers using the saved tax dollars — without any net change to operating expenses.
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Skepticism is the right response. We don't ask you to take our word for it — we bring institutional proof that convinced CPAs, CFOs, attorneys, and insurance brokers to enroll their own companies.
Darcy L. Hitesman, J.D.
35+ years as an Employee Benefits attorney specializing in IRC Section 125, ERISA, HIPAA, and the ACA. Her May 5, 2025 opinion letter concludes: “In this firm's opinion, the Program described satisfies applicable IRS requirements.”
She specifically reviewed the IRS Chief Counsel Advice memoranda on "double-dip" arrangements — the exact schemes the IRS has flagged — and concluded this program is built differently and compliantly.
CBIZ Advisors LLC
CBIZ independently reviewed the program against IRC §§ 125, 105, and 106, plus ERISA, ACA, and COBRA requirements. Their August 22, 2025 letter concludes: “If operated per its provisions, the Program appears to satisfy the requirements of ERISA, the ACA, and COBRA as well.”
This review was commissioned by Affinity Hospice's CEO before enrolling his nationwide organization — and the CFO (himself a CPA) shared the letter publicly in his testimonial.
Direct From the U.S. Government
Section 125 has been in the Internal Revenue Code since 1978. Congress wrote it there specifically to encourage employers to fund preventive healthcare for American workers. This is not a loophole — it is the precise, intended use of a 47-year-old federal law, grounded in IRS Revenue Ruling 69-154, the specific published ruling supporting the benefit payment structure.
→ Verify on IRS.gov — Section 125 Cafeteria Plans ↗Specifically about this comparison
Content reviewed by Virginia Fish, CPA — tax and employer benefits specialist with 10+ years in financial reporting and payroll tax strategy.
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