A Section 125 plan saves you money because pre-tax benefit dollars are not taxable wages, so you stop paying employer payroll tax on them. The math is simple, and the honest answer is that it works best when employees pay enough pre-tax. This guide shows the math by headcount, the break-even against the $35 per employee per month fee, and a way to calculate your own number in five minutes.
Key facts
- Employers pay 6.2% Social Security tax and 1.45% Medicare tax on wages, 7.65% combined (IRS, Tax Topic 751, 2026).
- Social Security tax applies only to wages up to $184,500 in 2026 (IRS, Tax Topic 751, 2026).
- Payments under a Section 125 cafeteria plan are excluded from FICA wages when they would not be wages without the plan (26 U.S.C. 3121(a)(5)(G), Cornell Legal Information Institute, 2026).
- Covered workers paid an average of $1,440 per year toward single coverage and $6,850 per year toward family coverage in 2025 (KFF Employer Health Benefits Survey, 2025).
- Summit Health Benefits charges a $35 per enrolled employee per month admin fee, paid out of the payroll tax the plan saves (Summit Health Benefits, 2026).
How much can companies save with Section 125 plans?
Employers save 7.65% of every pre-tax dollar their employees contribute. A company with 10 employees who each pay $571 per month pre-tax avoids about $5,240 in payroll tax per year (IRS, Tax Topic 751, 2026; KFF, 2025).
That $571 figure is the 2025 national average worker contribution for family coverage, $6,850 per year, divided by 12 (KFF, 2025). Single coverage is lower. The average worker paid $1,440 per year, or $120 per month (KFF, 2025). Your savings follow whichever contribution level your employees actually pay.
How do you calculate Section 125 savings?
Multiply total monthly pre-tax contributions by 7.65%, then subtract the plan fee. The 7.65% rate is the employer share of FICA, which is the federal payroll tax for Social Security and Medicare (IRS, Tax Topic 751, 2026).
Here is the formula in four steps.
- Add up what all enrolled employees pay pre-tax each month (premiums, FSA, supplemental benefits).
- Multiply that total by 0.0765. This is your monthly employer payroll tax savings.
- Subtract the plan fee. Summit Health Benefits charges $35 per enrolled employee per month (Summit Health Benefits, 2026).
- Multiply the result by 12 for the annual net.
Here is a worked example for a 10-employee company. The contribution levels are hypothetical, except the two labeled KFF averages. The employee income tax column assumes a 12% federal bracket, which is only an illustration.
| Pre-tax per employee per month | Employer payroll tax saved per employee | After $35 fee | 10 employees, annual net | Employee saves per month (FICA plus 12% income tax) |
|---|---|---|---|---|
| $120 (KFF average single coverage) | $9.18 | -$25.82 | -$3,098 | $23.58 |
| $300 | $22.95 | -$12.05 | -$1,446 | $58.95 |
| $458 (break-even) | $35.04 | $0.04 | $5 | $90.00 |
| $571 (KFF average family coverage) | $43.67 | $8.67 | $1,040 | $112.17 |
| $800 | $61.20 | $26.20 | $3,144 | $157.20 |
The table shows the truth: at an average single premium contribution of $120, a premium-only plan does not cover a $35 fee. The break-even is $35 divided by 7.65%, or about $457.52 per employee per month. Savings grow quickly above that line.
What is the break-even point for a Section 125 plan?
The break-even is about $458 per employee per month in pre-tax contributions. At that level the 7.65% payroll tax saved equals the $35 fee. Below it, the employer saves less than the fee.
This is why plan design matters more than the plan itself. Employers with higher family-coverage contributions, or with additional pre-tax benefits such as a dependent care FSA or supplemental coverage, cross the line sooner. Our guide to FICA savings from pre-tax benefits breaks down which benefits add to the pre-tax total. Summit Health Benefits plans around $56 to $101 of net employer benefit per enrolled employee per month after the $35 fee when elections are large enough (Summit Health Benefits planning estimate, 2026). That is an estimate for plan designs with higher pre-tax elections, not a guarantee, and the calculator shows your own result.
Do employees save money with a Section 125 plan too?
Yes. Employees skip the same 7.65% FICA on pre-tax pay, and they skip federal income tax on it too. The employee in the table at $571 per month keeps about $112 more each month, assuming a 12% federal bracket.
Employee take-home rises because pre-tax contributions lower taxable pay, a rule that comes from the cafeteria plan exclusion in the tax code (26 U.S.C. 125 and 3121(a)(5)(G), Cornell Legal Information Institute, 2026). State income tax treatment varies by state, so check yours. This employee benefit is also why a plan helps with hiring and retention without adding payroll cost.
What does a Section 125 plan cost an employer?
Summit Health Benefits charges $35 per enrolled employee per month, and the fee is paid out of the payroll tax the plan saves (Summit Health Benefits, 2026). Summit Health Benefits always states the fee per employee per month, never as an annual figure.
The fee shows up as a smaller reduction in your Form 941 payroll tax deposit, not as a bill. Never compare the fee alone to zero. Compare it to the savings column in the table above, which is why running the numbers first matters. Our Section 125 plan cost guide covers the cost side in more detail.
Which employers save the most?
Employers with more enrolled employees, higher family-coverage contributions and added pre-tax benefits save the most. Savings scale with headcount, because every enrolled employee adds to the pre-tax total.
Payroll tax is capped for Social Security at the $184,500 wage base for 2026, but most employees fall well under it, so the full 7.65% usually applies (IRS, Tax Topic 751, 2026). Read our Section 125 cafeteria plan guide for who qualifies, and our premium only plan guide if premiums are the only pre-tax item you plan to offer. The earlier maximizing FICA tax savings post covers the reasoning behind the same rule.
How do I get my payroll numbers fast?
Ask payroll for three numbers and paste them into the calculator. Copy this free email and send it to your payroll provider or bookkeeper.
Hello, I am pricing a Section 125 cafeteria plan. Please send me: (1) the number of W-2 employees who are enrolled in our health plan, (2) the average monthly amount each employee pays toward premiums through payroll, (3) any other pre-tax deductions such as dependent care or FSA, and (4) our current Form 941 total for the last quarter. Thank you.
Then take those answers to the Section 125 savings calculator and see where you land against the break-even.
Reviewed by a licensed benefits professional. Last reviewed: October 11, 2026.
Get Your Free Plan Design
A Summit Health Benefits advisor runs your payroll numbers through a Section 125 setup and shows the savings against the $35 PEPM fee before you decide anything.
Frequently Asked Questions
How much can companies save with Section 125 plans?
How do I calculate Section 125 savings?
Is there a Section 125 savings calculator?
What does a Section 125 plan cost an employer?
Do Section 125 plans save employees money?
Sources: IRS, Tax Topic 751, Social Security and Medicare Withholding Rates (last reviewed September 24, 2026); 26 U.S.C. 3121(a)(5)(G) and 26 U.S.C. 125, Cornell Legal Information Institute (2026); KFF, 2025 Employer Health Benefits Survey (2025); Summit Health Benefits, plan fee schedule (2026). Worked examples are hypothetical and use a 12% federal income tax bracket for illustration.