In today’s competitive job market, offering cost-effective benefits is essential for attracting and retaining top talent. A Section 125 Cafeteria Plan allows employees to save money on taxes while accessing essential benefits, making it a win-win for both employers and their workforce. But how exactly does a Section 125 plan work, and how does it help employees keep more of their hard-earned money?
This guide breaks down Section 125 and pre-tax benefits, explains their financial advantages, and shows how BrightPath’s Preventative Care Management Program (PCMP) makes the process seamless for employers.
A Section 125 Plan, also known as a Cafeteria Plan, is an IRS-approved benefits arrangement that allows employees to pay for certain benefits using pre-tax dollars. This means that eligible deductions—such as health insurance premiums, flexible spending accounts (FSAs), and dependent care assistance—are taken out of an employee’s paycheck before taxes are applied.
For a deeper dive into Section 125 plans, check out What Benefits Are Included in a Section 125 Plan? A Comprehensive Guide
Reduces taxable income, leading to higher take-home pay.
Lowers employer tax liability, including FICA and FUTA taxes.
Employees can choose from a range of pre-tax benefit options.
Ensures that benefit offerings remain tax-advantaged and compliant.
Employees benefit from a Section 125 plan primarily through pre-tax deductions, which lower their taxable income. Here’s an example of how it works:
Without Section 125 | With Section 125 |
Gross Pay: $4,000 | Gross Pay: $4,000 |
Taxes (20%): $800 | Pre-Tax Benefits: $300 |
Taxable Income: $4,000 | Taxable Income: $3,700 |
Net Pay: $3,200 | Taxes (20% of $3,700): $740 |
Net Pay: $3,260 (Savings: $60) |
In this scenario, the employee saves $60 per month ($720 per year) simply by enrolling in pre-tax benefits through a Section 125 plan.
Employees can pay for medical, dental, and vision coverage with pre-tax dollars.
Pre-tax savings for medical expenses, dependent care, and commuting costs.
Tax-advantaged savings for future medical expenses.
Helps cover childcare costs using pre-tax funds.
While traditional Section 125 plans provide significant tax savings, BrightPath’s Preventative Care Management Program (PCMP) takes it a step further by offering a fully managed, IRS-compliant solution that maximizes benefits for both employees and employers.
Meets all IRS, ACA, and HIPAA regulations.
BrightPath handles all setup, integration, and compliance.
The program funds itself through payroll tax savings.
Employees enjoy enhanced benefits without reducing take-home pay.
No, participation is optional. However, most employees opt in because it lowers their taxable income and increases take-home pay.
Yes. Employees must make their benefit elections during open enrollment, and changes can only be made after a qualifying life event (e.g., marriage, birth of a child).
Savings vary based on salary and tax rates, but employees can typically save 20-30% on eligible expenses through pre-tax deductions.
Unlike standard cafeteria plans, BrightPath’s fully managed PCMP requires zero HR involvement and is designed to provide maximum payroll tax savings with full IRS compliance.
Offering a Section 125 plan is one of the easiest ways to help employees save money while reducing employer payroll taxes. With BrightPath’s PCMP, you get a turnkey, compliant solution that enhances Section 125 benefits without increasing administrative workload.
