Section 125 Plan for Medical Practices: 2026 Employer Guide

A Section 125 plan lets a medical practice reduce employer FICA taxes by 7.65 percent on every dollar staff run through the plan pre-tax. For a 12-person primary care or specialist practice, that typically means $91 to $136 per enrolled employee per month in recovered payroll tax.

Quick Answer (as of 2026): A Section 125 plan lets a medical practice convert staff health premiums to pre-tax payroll deductions. The practice cuts employer FICA tax by 7.65 percent on every pre-tax dollar, which works out to $91 to $136 per enrolled employee per month. Medical assistants, nurses, and front-desk staff all qualify. Physician-owners in S-corps who own more than 2 percent do not.

A Section 125 plan for medical practices turns the health insurance premiums your staff already pay into pre-tax payroll deductions. The practice owner stops paying 7.65 percent employer FICA tax on those dollars, and each enrolled employee reduces their own income tax and FICA bill at the same time. Summit Health Benefits administers Section 125 plans for physician offices, group practices, urgent care centers, and specialty clinics at a flat fee of $35 per enrolled employee per month.

What is a Section 125 plan for a medical practice?

A Section 125 plan for a medical practice is a written benefit plan under Internal Revenue Code Section 125 that lets employees pay for health insurance and other qualified benefits before federal income tax and FICA are calculated. To understand the full mechanics for any employer, read the Section 125 cafeteria plan 2026 guide.

Medical practices are a strong fit for Section 125 because their staff mix is stable and the payroll deduction infrastructure is already in place. A typical primary care office has one to three physicians, two to four medical assistants, one or two licensed nurses or nurse practitioners, and a front-desk and billing team. Most of those employees already contribute toward group health coverage with after-tax dollars. A Section 125 plan moves those same dollars to the pre-tax column on the next payroll run without changing the underlying premium cost.

How much does a medical practice save with a Section 125 plan?

A medical practice saves 7.65 percent in employer FICA tax on every dollar of staff premiums that runs through the plan pre-tax. For a 12-person practice where each enrolled employee contributes $520 per month, the annual employer savings work out to 12 x $520 x 12 x 7.65 percent, which equals approximately $5,745 per year. The savings come from a reduced IRS Form 941 FICA deposit at every payroll, not from a separate reimbursement or end-of-year credit.

For more detail on how FICA recapture works across different election levels, see the FICA savings guide for pre-tax benefits.

The table below shows the recapture range for a 12-person primary care practice at three different monthly election levels.

Monthly election per employeeAnnual employer FICA recaptureAnnual Summit admin feeNet employer benefit per year
$400$4,427$5,040Break-even; employee income tax savings remain
$520$5,745$5,040$705 net FICA gain
$600$6,631$5,040$1,591 net FICA gain

At $520 per month, the employer net benefit after the Summit admin fee is $705 per year, and each of the 12 enrolled employees also reduces their own federal income tax and FICA bill. The employee income tax savings are not included in the employer net figure above. A medical assistant earning $42,000 who elects $480 per month saves approximately $150 to $175 per month in combined federal income tax and employee FICA, depending on their bracket.

Summit Health Benefits sets up Section 125 plans for medical practices in two weeks. We handle the written plan document, payroll deduction setup, and staff enrollment from start to first pre-tax payroll. Get a free savings estimate for your practice.

Which medical practice employees qualify for a Section 125 plan?

All W-2 employees of a medical practice are eligible for a Section 125 plan. This includes medical assistants, licensed practical nurses (LPNs), registered nurses (RNs), nurse practitioners (NPs), physician assistants (PAs), medical receptionists, billing and coding staff, practice managers, and any W-2-employed physicians on the payroll.

The employees who do not qualify are S-corporation shareholders who own more than 2 percent of the practice entity. Under IRS Notice 2008-1, shareholders owning more than 2 percent of an S-corp are treated as partners for benefit purposes and cannot have their health premiums run through a Section 125 plan pre-tax on their own behalf. A solo physician who is the sole owner of an S-corp falls outside the plan for their own premiums. The physician can still sponsor the plan for all W-2 employees, and those employees receive the full pre-tax savings.

Sole proprietors and partners in a general partnership also cannot participate in a Section 125 plan for their own premiums, for the same tax treatment reason. Physicians in multi-physician partnerships where individual ownership is below 2 percent may qualify if the specific facts support it, which requires counsel review.

Part-time W-2 employees can participate if the plan document allows it. Many medical practices choose to include part-time staff after a waiting period because the enrollment numbers strengthen the employer FICA math.

What does a Section 125 plan cost for a medical practice?

Summit Health Benefits charges $35 per enrolled employee per month (PEPM) to administer a Section 125 plan. That fee covers the written plan document, summary plan description, annual renewals, payroll deduction coordination, and employee enrollment support. There is no setup fee and no contract beyond a rolling annual term.

The $35 PEPM fee is recovered through employer FICA savings when each employee's monthly election exceeds approximately $458 ($35 divided by 7.65 percent = $457.52). For a nurse practitioner electing $560 per month in health premiums, the practice recovers the $35 fee in FICA savings and still nets an additional $28 per month per enrolled NP. For a medical assistant electing $390 per month, the FICA savings alone do not fully cover the $35 fee, but the employee income tax savings and improved benefits access often justify the net cost. For more on how to evaluate the cost against the full benefit picture, see our Section 125 plan cost breakdown.

How does a Section 125 plan reduce W-2 wages for medical practice staff?

A Section 125 election reduces the employee's W-2 Box 1 (federal taxable wages), Box 3 (Social Security wages), and Box 5 (Medicare wages) by the amount of each pre-tax election. A medical assistant earning $42,000 who elects $480 per month ($5,760 per year) will receive a W-2 with federal taxable wages of approximately $36,240, not $42,000. The same reduction applies to Social Security and Medicare wage boxes.

This is why Section 125 reduces W-2 wages without reducing the employee's actual take-home pay. The employee receives more take-home pay on each paycheck because less tax is withheld, even though the gross pay line stays the same. The premium that used to come out after tax now comes out before tax, which lowers the taxable base and lowers the withholding.

For a primary care physician who wants to show staff exactly how their check changes, the comparison is direct. A medical receptionist earning $3,200 per month electing $400 per month pre-tax sees approximately $130 to $145 more in net pay per month compared to contributing that same $400 after tax. The combination of lower income tax withholding and lower employee FICA produces that difference without any change in the receptionist's gross salary.

What compliance rules apply to Section 125 plans in a medical practice?

Section 125 plans at medical practices must meet the same IRS requirements as any other employer. The plan must be in writing before any elections take effect. Employees must make elections before the plan year begins, with limited exceptions for qualifying life events such as marriage, birth, or loss of coverage. The plan cannot offer deferred compensation.

Medical practices operating as S-corporations need to confirm that the plan document clearly identifies eligible participants and excludes more-than-2-percent shareholders from Section 125 benefit treatment. This is a common compliance gap in practices that adopted a Section 125 plan years ago and have not updated the documents since.

For practices with 100 or more plan participants, the plan may be subject to ERISA Form 5500 filing requirements. Medical practices with fewer than 100 participants on the first day of the plan year are generally exempt from Form 5500 filing for the Section 125 plan itself, though the underlying insured benefits may have separate reporting obligations.

Summit Health Benefits handles plan document drafting and annual compliance review as part of the $35 PEPM service. Practices do not need to engage outside ERISA counsel for a standard premium-only Section 125 plan.

For medical practices that want to compare Section 125 against other strategies for reducing the cost of coverage, including health sharing, ICHRAs, or supplemental benefits, see the small business health insurance alternatives guide and the zero-cost employee health benefits guide.

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Frequently Asked Questions

Can a physician-owner of a medical practice use a Section 125 plan?
A physician who owns more than 2 percent of the medical practice entity as an S-corporation cannot run their own health premiums through the practice's Section 125 plan. Under IRS Notice 2008-1, more-than-2-percent S-corp shareholders are treated as partners for benefit purposes, which disqualifies them from Section 125 treatment on their own premiums. The physician can still sponsor and maintain the plan for all W-2 employees, and those employees receive the full pre-tax savings. Sole proprietor physicians and general partnership physicians face the same exclusion for their own premiums. A W-2-employed physician who does not own the practice entity can participate without restriction.
Which staff in a medical practice qualify for a Section 125 plan?
All W-2 employees of a medical practice are eligible for a Section 125 plan. This includes medical assistants, licensed practical nurses, registered nurses, nurse practitioners, physician assistants, medical receptionists, billing and coding staff, practice managers, and W-2-employed physicians who do not own more than 2 percent of the S-corp. Part-time W-2 employees can also participate if the plan document includes them after a waiting period. Independent contractors who receive a 1099 form are not employees and cannot participate in the practice's Section 125 plan.
How much does a Section 125 plan cost for a medical practice?
Summit Health Benefits charges $35 per enrolled employee per month to administer a Section 125 plan for a medical practice. There is no setup fee. A 12-person practice with 10 enrolled employees pays $350 per month or $4,200 per year in admin fees. At a typical election of $520 per month per employee, the employer FICA recapture for those 10 employees is approximately $4,786 per year, producing a net FICA gain of $586 per year before counting the federal income tax savings employees receive on their own paychecks. The admin fee is not paid from operating cash but from a reduced IRS Form 941 FICA deposit at each payroll run.
What is the minimum number of employees needed to set up a Section 125 plan?
There is no minimum employee count required by the IRS to establish a Section 125 plan. A medical practice with two W-2 employees can set one up. The practical minimum for the employer FICA math to clearly outpace the $35 PEPM admin fee is typically four to five enrolled employees contributing at or above $460 per month. Below that threshold, the employer FICA savings may fall short of the admin fee, but the income tax savings delivered to employees still provide meaningful compensation value that many practice owners treat as a non-cash benefit enhancement worth the cost.
Does a medical practice need an attorney to set up a Section 125 plan?
A medical practice does not need outside legal counsel to establish a standard premium-only Section 125 plan. Summit Health Benefits drafts the plan adoption agreement and summary plan description as part of the $35 PEPM administration service. ERISA counsel is typically needed only when the practice wants to add a health flexible spending account (FSA) or dependent care FSA to the plan, which involve additional compliance considerations beyond basic premium-only treatment. For a practice that wants only the premium pre-tax election, Summit handles the full written plan document without additional legal fees.
How fast can a medical practice set up a Section 125 plan?
A medical practice can go from signed engagement to first pre-tax payroll in approximately two weeks. Summit Health Benefits drafts the plan document, collects employee elections, and coordinates with the practice's payroll provider to configure the deduction codes. For practices using common payroll platforms such as ADP, Gusto, Paychex, or Paylocity, the deduction configuration is standard and typically takes one to two payroll cycles to confirm. The plan must be in writing before the first election takes effect, so timing is set around the next available payroll date after document execution.
Does a Section 125 plan affect a medical assistant's Social Security benefits?
A Section 125 election reduces the wages reported in W-2 Box 3 (Social Security wages), which means the pre-tax election amount is not counted toward the employee's Social Security earnings record for benefit calculation purposes. For a medical assistant earning $42,000 who elects $5,760 per year pre-tax, the reported Social Security wages would be approximately $36,240 instead of $42,000. Over a career, this can have a small effect on the eventual Social Security benefit calculation. Most employees find the immediate net pay increase from the tax savings outweighs the marginal long-term effect on projected Social Security benefits, but each employee should evaluate this based on their own situation.
Can a medical practice offer a Section 125 plan if it already has a group health plan?
Yes. A Section 125 plan is a wrapper plan, not a replacement for the underlying health coverage. A medical practice with an existing group health plan simply adds a Section 125 plan on top of it so that employee premium contributions run pre-tax through payroll instead of after-tax. The underlying group health plan stays exactly as it is. The Section 125 plan document designates the group health premiums as a qualified benefit under the cafeteria plan, and the payroll system is updated to take the deduction before tax. No change to the coverage itself is required. Summit Health Benefits coordinates the transition from after-tax to pre-tax deductions without disrupting coverage or carriers.
Summit Health Benefits works with medical practices of all sizes. From a two-physician family practice to a 30-person multi-specialty group, we handle the plan document, enrollment, and payroll setup at $35 per enrolled employee per month. Schedule a free savings review for your practice.

Sources: IRS Internal Revenue Code Section 125; IRS Notice 2008-1 (S-corporation shareholder health insurance); IRS Publication 15-B (Employer's Tax Guide to Fringe Benefits); Department of Labor ERISA Form 5500 filing thresholds; IRS Form 941 instructions (FICA deposit reduction).