How Employee Health Insurance Contributions Work Under a Section 125 Plan

Under a Section 125 plan, an employee's share of the health premium is paid before income tax and FICA. Here is how the math works, what workers pay on average, and how employers set contribution amounts.

Quick Answer (as of 2026): Under a Section 125 plan, an employee's share of the health premium is taken from pay before federal income tax and FICA. The employer still pays its own share. KFF's 2025 survey found workers pay about 16% of single premiums and 26% of family premiums, and pre-tax treatment lowers that cost.

Employee contributions to health insurance under a Section 125 plan are the part of the premium the employee pays through payroll, taken out before taxes. A Section 125 cafeteria plan is an IRS-approved arrangement, under Internal Revenue Code Section 125, that lets employees pay for certain benefits with pre-tax pay.

Most employers already deduct an employee share. The question is whether that share comes out of taxed pay or untaxed pay. This guide shows the difference in dollars and explains the rules for setting the amounts.

How much do employees pay toward employer health insurance?

Workers pay about 16% of the premium for single coverage and 26% for family coverage, on average. The KFF 2025 Employer Health Benefits Survey found the average single premium was $9,325 a year, with workers paying $1,440. The average family premium was $26,993, with workers paying $6,850.

Small firms ask more of their workers. KFF found that 29% of covered workers at firms with 10 to 199 employees pay more than half of the family premium, compared with 5% at larger firms. That gap is one reason small employers look at ways to lower what employees pay without raising their own cost. Our guide to small business health insurance costs covers the employer side of those numbers.

How does a pre-tax employee contribution work?

A pre-tax contribution is a payroll deduction the employee elects in advance, taken before federal income tax, Social Security tax and Medicare tax are calculated. Under a Section 125 plan, the employee chooses between taking cash or paying for a qualified benefit. Amounts used for the benefit are excluded from gross income, according to IRS Publication 15-B (2026).

Without a cafeteria plan, the same deduction comes out after tax. The premium is identical. The employee's take-home pay is lower because tax was already withheld on the dollars used to pay it. The employer also pays FICA on wages the employee never actually receives.

The employer share works the same either way. Employer-paid premiums for employee health coverage are already tax-free to the employee. The Section 125 plan only changes the treatment of the employee's own share.

What does the math look like for one employee?

Take a disclosed hypothetical. An employee pays $250 a month toward a health premium. The employee is in the 22% federal bracket, before any state tax.

  • Employer FICA saved: 7.65% of $250 is $19.13 per month.
  • Employee tax saved: 22% federal plus 7.65% FICA is 29.65%. On $250, that is about $74.13 per month, or roughly $890 a year.

For a team of 10 employees who each contribute $250 a month, the employer's FICA drops by about $191 a month, or roughly $2,295 a year. The FICA tax savings guide shows the same math with other benefit types.

See what your employee contributions are worth pre-tax. A benefits expert can run this math on your actual payroll and show how much your team would keep. Schedule a review.

Can an employer contribute different amounts for different employees?

Yes, within limits. Employers can generally set different contributions for bona fide employee classes, such as full-time and part-time workers, salaried and hourly workers, or employees in different locations. Employees in the same class should get the same terms (PeopleKeep, 2026).

Employers cannot set contributions based on protected characteristics such as race, sex, religion or disability. State insurance rules and carrier participation rules can add limits on top, so check both before changing a contribution tier.

A cafeteria plan adds one more test. IRS Publication 15-B (2026) says a plan fails if more than 25% of the tax-free benefits go to key employees, and the value of their benefits then becomes taxable wages. Our nondiscrimination testing guide explains how that test is run.

Larger employers face a separate check. An employer with 50 or more full-time equivalent employees must offer affordable coverage. For plan years beginning in 2026, coverage counts as affordable when the employee's cost for the lowest-priced self-only plan is no more than 9.96% of household income, under IRS Revenue Procedure 2025-25.

Can an employee change the contribution during the year?

Not freely. Under Treasury Regulation 1.125-4, elections are made before the plan year and stay in place for the whole year. An employee can change a contribution mid-year only after a qualifying event, such as a marriage, a birth, a change in employment status, or a significant change in cost or coverage. The change must match the event.

That rule is why the election form and the plan document matter. Employers who skip the written plan document risk losing the tax treatment for everyone. Our premium only plan guide explains the simplest cafeteria plan design, and the setup guide lists the steps in order.

Who sets up a Section 125 plan for an employer?

Most employers hand the work to a plan administrator or their broker, because the plan document, elections and testing have to be right the first time. Some payroll providers offer a basic version. A broker partnership is another route.

Summit Health Benefits is a Section 125 plan administrator. Summit provides the written plan document and summary plan description, supports nondiscrimination testing, and has its plan documents reviewed by ERISA attorneys.

On pricing, Summit charges $35 per enrolled employee per month. That fee is paid from the FICA savings the plan creates, so the employer still nets about $56 to $101 per enrolled employee per month. Your actual savings depend on how much your employees elect, because the FICA savings come from every pre-tax dollar in the plan. You can estimate your own numbers with the savings calculator, or start at the Section 125 setup page.

For the full rules, read our Section 125 cafeteria plan guide.

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Frequently Asked Questions

Are employee health insurance contributions pre-tax under a Section 125 plan?
Yes. Under a Section 125 plan, an employee's share of the health premium is deducted before federal income tax, Social Security tax and Medicare tax. Without a cafeteria plan, the same deduction comes out of taxed pay.
How much do employees pay for employer health insurance on average?
The KFF 2025 Employer Health Benefits Survey found workers pay an average of $1,440 a year for single coverage and $6,850 a year for family coverage. That is about 16% and 26% of the total premium.
Can an employer contribute different amounts to different employees?
Yes, for bona fide classes such as full-time and part-time workers. Employees in the same class should get the same terms, and employers cannot base amounts on protected characteristics. State rules and carrier participation rules can add limits.
How much does an employer save when employees pay premiums pre-tax?
The employer avoids 7.65% FICA on every pre-tax dollar. On a $250 monthly employee contribution, the employer saves about $19.13 per month for that employee. Total savings depend on how many employees participate and how much they elect.
Can an employee change a health insurance contribution mid-year under Section 125?
Only after a qualifying event, such as marriage, birth, or a change in employment status. Treasury Regulation 1.125-4 says elections stay in place for the plan year, and any change must match the event.
What is the Section 125 nondiscrimination rule for employee contributions?
IRS Publication 15-B (2026) says a cafeteria plan fails if more than 25% of the tax-free benefits go to key employees. The plan is also tested to make sure it does not favor highly compensated employees. If it fails, their benefits become taxable wages.
How much does Summit Health Benefits charge to run a Section 125 plan?
Summit Health Benefits charges $35 per enrolled employee per month. The fee is paid from the FICA savings the plan creates, so the employer still nets about $56 to $101 per enrolled employee per month.

Sources: KFF, 2025 Employer Health Benefits Survey (2025); IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits (2026); IRS Revenue Procedure 2025-25 (2026 affordability percentage, 9.96%); Treasury Regulation 26 CFR 1.125-4 (permitted election changes); Internal Revenue Code Section 125; PeopleKeep, Can an Employer Contribute Different Amounts Toward Health Insurance (2026).