Section 125 Plan Florida Small Business — Pre-Tax Health Insurance

Updated May 2026 · Florida Plan Finder — Licensed Florida Health Insurance Producer (NPN #21249133)

One of the simplest ways a Florida small business can reduce payroll taxes while simultaneously increasing the value of employee health benefits costs almost nothing to set up: the Section 125 cafeteria plan. Under IRC Section 125, employees can choose to receive certain fringe benefits — most commonly pre-tax health insurance premium contributions — instead of taxable wages. The result is lower taxable income for the employee, lower FICA costs for the employer, and no change to the actual health coverage.

What Is a Section 125 Cafeteria Plan?

The "cafeteria" metaphor refers to the ability for employees to choose from a menu of benefits. In practice, most small business Section 125 plans offer a simple premium-only plan (POP) — the most common and easiest to administer — where employees elect to pay their portion of health insurance premiums on a pre-tax basis.

More comprehensive cafeteria plans can also include:

• Health Flexible Spending Accounts (Health FSA)
• Dependent Care Flexible Spending Accounts (DCFSA)
• Dental and vision premium contributions
• Supplemental insurance premium contributions
• Accident and cancer insurance premium contributions

The simplest version — the premium-only plan — is what most Florida small businesses set up first. It requires minimal administration and delivers immediate tax savings.

How the Tax Savings Work

Without a Section 125 plan: An employee earns $4,000/month gross. They pay $350/month toward their health insurance premium through payroll. That $350 comes out of already-taxed wages — the employee pays income tax and FICA on it before contributing. The employer also pays 7.65% FICA on the full $4,000.

With a Section 125 plan: The same employee elects to contribute $350/month through the cafeteria plan. Their taxable wages drop to $3,650. They pay no income tax and no FICA on the $350. The employer pays 7.65% FICA on $3,650 instead of $4,000 — saving $26.78/month per employee. At 10 employees over 12 months: $3,213 in annual FICA savings for the employer.

The Written Plan Document Requirement

IRS regulations under Treas. Reg. §1.125-1 require a written cafeteria plan document that exists before the plan year begins. The document must include:

• The plan year (typically calendar year or fiscal year)
• Eligible employees and waiting period rules
• The benefits available under the plan
• Maximum and minimum benefit elections
• Election change rules (when employees can change elections mid-year)
• The plan administrator's name and address
• COBRA continuation rules (for health FSA)

An oral agreement or informal payroll deduction does not qualify. Many third-party administrators (TPAs) provide Section 125 plan documents for $200-$500 as a one-time setup cost. Annual administration fees vary but are typically $300-$800 for small businesses. The FICA savings alone usually pay for administration in the first quarter.

2026 Benefit Limits Under Section 125

Who Can and Cannot Participate

Eligible participants in a Section 125 plan include W-2 employees. The following cannot participate in a Section 125 plan:

• Sole proprietors — not employees of their own business
• Partners in a partnership — treated as self-employed
• More-than-2% S-corp shareholders — treated as partners under IRC §1372
• C-corp shareholders owning more than 5% — treated as highly compensated if plan discriminates

The exclusion of S-corp owners is a common pain point. An S-corp with 5 non-owner employees can set up a Section 125 plan for those employees and save FICA, but the 2%+ shareholder-owner must handle their health insurance through the W-2 Box 1 / Schedule 1 process instead. See our S-corp health insurance deduction guide for that process.

Non-Discrimination Testing

A Section 125 plan must pass IRS non-discrimination tests to maintain its tax-advantaged status. Specifically:

• Eligibility test: The plan must not discriminate in favor of highly compensated employees (HCEs, those earning over $135,000 in 2026) in terms of eligibility
• Contributions and benefits test: Benefits must not favor HCEs
• 25% concentration test (FSA only): No more than 25% of FSA benefits can go to officers, shareholders, or HCEs

For most small Florida businesses with relatively equal premium contributions for all employees, these tests are easily passed. A TPA or benefits administrator should run the tests annually.

Adding an HSA to Your Section 125 Plan

A Section 125 plan pairs extremely well with an HSA if your health plan is an HDHP. Employees can fund their HSA through pre-tax payroll deductions under the Section 125 plan, maximizing the tax benefit. In 2026, employees can contribute up to $4,400 (individual) or $8,750 (family) to an HSA — all pre-tax when routed through Section 125.

The combination of an HDHP + Section 125 + HSA creates the most tax-efficient health benefit structure available to a Florida small business with employees. See our HSA Florida small business tax strategy guide for full details.

For the broader context of small business health insurance tax write-offs, see our Florida small business health insurance tax deduction guide. For a full overview of small business health insurance options, see our Florida small business health insurance guide.

Frequently Asked Questions