A Section 125 cafeteria plan is a written plan document that allows Florida small businesses to let employees pay their share of group health insurance premiums with pre-tax dollars. Without a Section 125 plan, employee premium contributions are made after taxes — meaning both the employee and employer pay FICA taxes on those amounts. With a Section 125 plan, both parties save. For most businesses offering health insurance, establishing a Section 125 plan is a no-cost step that generates immediate tax savings.
When employees pay their share of health premiums through a Section 125 plan, those contributions are excluded from FICA wages. This means:
| Scenario | Without Section 125 | With Section 125 | Annual Saving |
|---|---|---|---|
| 5 employees paying $150/mo employee share | FICA applies to $9,000/yr total employee contributions | FICA excluded on $9,000/yr | ~$688/yr employer FICA saved |
| 10 employees paying $175/mo employee share | FICA applies to $21,000/yr | FICA excluded on $21,000/yr | ~$1,607/yr employer FICA saved |
| 25 employees paying $175/mo employee share | FICA applies to $52,500/yr | FICA excluded on $52,500/yr | ~$4,016/yr employer FICA saved |
Most Florida payroll providers (Gusto, ADP, Paychex) include Section 125 plan document setup as part of their payroll service or as a low-cost add-on. Many benefits brokers also provide cafeteria plan documents at no additional charge when you enroll through them.
No — it is not legally required. Employees can pay their premium share after-tax without a Section 125 plan. However, the tax savings for both the employer and employee are significant, and setup is typically free or very low-cost. There is no good reason not to establish one when offering group health benefits.
No — IRS rules prohibit S-Corp shareholders who own more than 2% of stock from participating in Section 125 plans. Their health insurance premiums cannot be made pre-tax through a cafeteria plan. Instead, their premiums follow the special S-Corp 2% shareholder rules (added to W-2 Box 1 wages, deducted on personal return via Schedule 1).
Yes — a Section 125 plan can include a Health Flexible Spending Account (FSA), Dependent Care Assistance Plan (DCAP/dependent care FSA), and premium-only plan (POP) for health insurance premiums. Most Florida small businesses start with a premium-only plan (the simplest and lowest-cost version) and can add FSA or dependent care components later if employees request them.
Our brokers help structure the full benefits package — including the Section 125 plan document.
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