Section 125 for Home Care Agencies: FICA Savings for Caregiver Payrolls

The home care workforce has nearly doubled over the last decade, from about 1.4 million workers in 2014 to almost 3.2 million in 2024, according to PHI, the leading research organization on the direct care workforce. Home health and personal care aides now make up the single largest occupation in the country, and they earned a median wage of just $17.21 an hour in May 2025, per the U.S. Bureau of Labor Statistics.

That combination, a huge and growing workforce paid modest wages, is exactly the setup where a Section 125 cafeteria plan produces the most value per payroll dollar. It also means most home care agencies have never had the FICA recapture opportunity modeled for them, because their attention is consumed by staffing, scheduling, and compliance with state home care licensure rules.

What Is a Section 125 Plan and How Does It Work for a Home Care Agency?

A Section 125 cafeteria plan is a written benefit plan under Internal Revenue Code Section 125 that lets W-2 employees pay for qualified benefits, such as health insurance premiums, with pre-tax payroll dollars instead of after-tax dollars. The employee's taxable wages drop by the amount of the pre-tax election, which lowers the employee's federal income tax and FICA withholding, and lowers the employer's FICA tax bill by the same 7.65% on the same reduced wage base.

For a home care agency, this applies to every W-2 caregiver, scheduler, and office employee the same way it applies at any other employer. A caregiver earning the industry median of roughly $35,800 a year who elects $200 a month in pre-tax premium contributions reduces her taxable wages by $2,400 a year. The agency's payroll system applies the deduction before calculating withholding, and the agency's IRS Form 941 FICA deposit drops accordingly. See the full mechanics in our Section 125 cafeteria plan guide.

Which Home Care Workers Are Eligible for a Section 125 Plan?

Only caregivers paid as W-2 employees are eligible. Caregivers classified as 1099 independent contractors cannot participate in a Section 125 plan at all, because the plan only reduces wages reported on a W-2, and a 1099 worker has no wage base for a pre-tax election to reduce.

This eligibility rule carries more weight in home care than in most industries, because caregiver misclassification is a well-documented, ongoing enforcement issue. State labor departments and the U.S. Department of Labor have brought repeated actions against home care agencies for treating caregivers as independent contractors when the working relationship, set schedules, agency-assigned clients, agency-set rates, meets the legal test for employee status. An agency correcting this classification gains two things at once: reduced wage-and-hour liability, and a workforce that can now access pre-tax benefits it could not touch before.

Who typically qualifies once classification is confirmed:

• W-2 home health aides and personal care aides, whether full-time, part-time, or per-diem, as long as they meet the plan's hours and tenure requirements
• Live-in caregivers paid as W-2 employees, subject to the same eligibility terms as hourly staff
• RNs and LPNs on staff for skilled visits or supervision
• Schedulers, intake coordinators, and office administrative staff
• Agency owners paid as W-2 employees of a C-corp or standard S-corp arrangement, though S-corp owners holding more than 2% of the company are excluded, the same restriction covered in our Section 125 guide for S-corp shareholders

Caregivers paid through a staffing agency or registry, rather than employed directly, are not eligible for the home care agency's plan, since they are not that agency's employees.

How Much Can a Home Care Agency Save With a Section 125 Plan?

A home care agency's FICA savings scale with enrolled W-2 headcount and election amounts. Employers typically recapture $91 to $136 per enrolled employee per month in FICA taxes, based on the standard 7.65% employer FICA rate applied to pre-tax elections.

Here is how that adds up across a realistic 45-person home care agency:

Summit Health Benefits administers Section 125 plans for a flat $35 per enrolled employee per month, funded from the agency's reduced IRS Form 941 FICA deposit rather than operating cash. For this 45-person agency, that is $18,900 per year in fees against $8,758 to potentially over $13,000 per year in FICA recapture at higher participation, plus every enrolled caregiver keeps $70 to $110 more of their own paycheck monthly. For the full line-by-line breakdown of how employer-side savings are calculated, see our FICA tax savings guide.

Does a Section 125 Plan Help with Caregiver Turnover and Recruitment?

Indirectly, yes, though a Section 125 plan alone will not fix turnover. Direct care worker turnover is a persistent industry problem, and the sector needs an estimated 9.7 million total job openings from 2024 to 2034 once departures and growth are combined, according to PHI's workforce projections. A caregiver choosing between two similar agencies will weigh take-home pay and any benefits offered, and a pre-tax health benefit that raises net pay by $70 to $110 a month at no cost to the agency's base wage budget is a real, if modest, differentiator in a tight labor market.

Because caregiver wages sit well below the median for all U.S. occupations, every pre-tax dollar matters more, proportionally, than it would for a higher-earning workforce. Pairing a Section 125 plan with low-cost supplemental options, rather than assuming every caregiver wants or can afford comprehensive major medical, tends to drive stronger participation. Our guide to zero-cost employee health benefits covers voluntary options that work well for hourly, wage-sensitive workforces like caregiving staff.

What Benefits Work Best for Home Care and Caregiver Workforces?

Most agencies start with a Premium Only Plan, which converts existing health, dental, and vision premium deductions from after-tax to pre-tax with no new benefits required. If W-2 caregivers already carry group coverage, a Premium Only Plan creates savings with minimal administrative change.

Agencies serving a lower-wage caregiver population often add voluntary accident and hospital indemnity coverage through the same Section 125 plan. Premiums run $10 to $30 per month, benefits pay cash directly to the caregiver for a covered event, and caregivers who decline comprehensive major medical because of cost will frequently accept these lower-cost options instead. Given how physically demanding caregiving work is, lifting, transferring, and assisting clients, accident coverage is directly relevant to the actual job.

A Health FSA, capped at $3,400 per employee for 2026 under IRS rules, helps caregivers offset out-of-pocket costs, but agencies should model their turnover rate before adding one. If a caregiver spends the full annual FSA election and separates from the agency before contributing that much through payroll, the agency absorbs the difference. In an industry where the workforce has grown by more than double in a decade and per-diem and part-time roles are common, that overspend risk deserves attention during plan design.

Does a Section 125 Plan Trigger Nondiscrimination Testing for Home Care Agencies?

Yes. A Section 125 plan must pass IRS nondiscrimination testing every year to keep its tax-favored status for all participants, not just the highest earners. The IRS runs three tests: an eligibility test checking the plan does not exclude too many non-highly compensated employees, a contributions and benefits test checking that highly compensated employees do not receive disproportionately richer benefits, and a key employee concentration test capping benefits going to key employees at 25% of the plan total.

Home care agencies typically pass these tests comfortably, since the workforce is overwhelmingly hourly caregivers earning well below the 2026 highly compensated threshold of $160,000, with only a handful of owners or senior administrators earning above it. Our nondiscrimination testing guide walks through how each test is calculated and what to do if a plan design needs adjustment.

How Does a Home Care Agency Set Up a Section 125 Plan?

Setup runs in four steps once eligible headcount is confirmed. First, verify which caregivers and staff are properly classified as W-2 employees rather than 1099 contractors, since misclassified workers cannot participate until reclassified. Second, choose plan design, typically a Premium Only Plan alone or paired with voluntary accident coverage or a Health FSA. Third, run nondiscrimination testing against the actual eligible group before the plan year starts. Fourth, configure payroll deduction codes with the agency's payroll provider so pre-tax elections correctly reduce W-2 Boxes 1, 3, and 5 from the first payroll cycle.

Most agencies complete setup within a month once the eligible group is confirmed. Agencies weighing how a Section 125 plan fits alongside other coverage options, including for caregivers who prefer individual marketplace coverage, should also review our guide to small business health insurance alternatives.

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Frequently Asked Questions

Ready to see what your caregiver workforce could save? Summit Health Benefits models your exact W-2 headcount before you commit to anything.

Sources: PHI (direct care workforce size and growth data), U.S. Bureau of Labor Statistics (home health and personal care aide median wage, May 2025), Internal Revenue Service (Section 125 rules, FICA rates, 2026 Health FSA contribution limit, highly compensated employee threshold), U.S. Department of Labor (worker classification enforcement).