How It Works — Section 125 Cafeteria Plan Explained

Summit Health Benefits uses IRS Section 125 to fund employer-sponsored healthcare through payroll tax savings. No direct employer payment. No employee premium. Here is exactly how the mechanics work.

How Section 125 Works

A Section 125 Cafeteria Plan converts a portion of employee payroll into pre-tax benefit elections. This reduces the taxable wage base for both the employer and employee, generating FICA tax savings that fund the healthcare benefit.

How the Free Plan Works

The free Cafeteria Plan costs employers $0 per employee per month. FICA savings of approximately $91.81 per employee per month cover the cost of virtual care, prescriptions, dental, and vision benefits.

Step 1: Pre-Tax Contributions

Employees elect a qualifying benefit amount during open enrollment. That amount is withheld from gross pay before FICA and income taxes are calculated, reducing taxable wages for both parties.

Step 2: Employer Saves Payroll Taxes

The employer's FICA liability drops by 7.65% of the pre-tax benefit amount. For a $250 monthly election, the employer saves $19.13 per employee per month — $91.81 when accounting for the full benefit funding structure.

Step 3: Savings Fund the Benefits

The combined FICA savings from employer and employee are channeled into the Section 125 benefit fund, paying for healthcare coverage with no additional cash outlay required from either party.

How the Full Coverage Option Works

The Premium Plan adds HealthShare coverage for $125 per employee per month. This covers hospitalizations, ER visits, maternity, cancer, and major medical events on top of the base Cafeteria Plan benefits.

Market Price Comparison

Traditional group health insurance typically costs $400–$800 per employee per month. The Summit Health Benefits Cafeteria Plan delivers comparable day-to-day coverage at $0 employer cost through Section 125 tax mechanics.

Our Bundled Price

The Cafeteria Plan is $0 PEPM. The Premium HealthShare option is $125 PEPM. Both are offset by FICA savings, making the net employer cost significantly lower than any traditional group health plan.

Why Employees' Paychecks Go Up

An employee earning $2,600 per month who elects $250 in pre-tax benefits reduces their FICA liability by approximately $19.13, increasing their net take-home pay while simultaneously receiving free family healthcare coverage.

Frequently Asked Questions

Common questions about Section 125 mechanics, employer eligibility, FICA savings calculations, and implementation timelines are answered on our FAQ page and in dedicated Section 125 guides.

Ready to See Your Numbers?

Use the savings calculator to see your exact FICA savings based on your employee count and average wage. Or schedule a free 10-minute consultation — most employers see their full savings analysis within 24 hours.