Section 125 Cafeteria Plan for Florida Small Businesses

What Is a Section 125 Cafeteria Plan?

A Section 125 cafeteria plan is a written plan document that allows employees to pay for qualified benefits — primarily health, dental, and vision insurance premiums — using pre-tax payroll dollars. Without a Section 125 plan, employee premium contributions come from after-tax wages. With one, those same contributions are excluded from federal income tax and FICA (Social Security and Medicare) withholding.

Section 125 plans are named after the IRS code section that authorizes them. They're sometimes called "POP plans" (Premium Only Plans) when limited to insurance premium deductions. Almost every Florida small business that offers group health coverage should have one.

The Savings for Employees and Employers

Who Saves	What They Save	On What
Employee	Federal income tax (22–32% bracket typically)	Their premium contribution
Employee	FICA — 7.65% (Social Security + Medicare)	Their premium contribution
Employer	FICA matching — 7.65%	Employee's premium contribution

Example: 5-Employee Florida Business

Employees each contribute $200/month toward premiums = $12,000/year total employee contributions.

Employer FICA savings: $12,000 × 7.65% = $918/year
Employee savings (per worker at 22% bracket + 7.65% FICA): $200/month × 29.65% = $59.30/month = $712/year per employee
Section 125 setup cost: $200–$400 one-time

The employer's annual FICA savings alone typically exceed the one-time setup cost within the first year.

What the Plan Document Must Include

IRS regulations require a written Section 125 plan document. The document must include:

Plan name, employer name, and plan year dates
Eligible employees and eligibility waiting period
List of qualified benefits available under the plan
Maximum benefit amounts and election procedures
Rules for changing elections (qualifying life events)
COBRA and continuation provisions if applicable

A Section 125 plan document does not need to be filed with the IRS — it is kept on file by the employer and provided to employees. It must be executed before the plan's effective date. A plan cannot be established retroactively.

Common Mistake: Many Florida small businesses assume that running payroll deductions for health premiums automatically makes them pre-tax. It does not — a written Section 125 plan document must exist and be in effect before pre-tax treatment applies. Without the plan document, the IRS treats premium deductions as after-tax, and the employer owes back FICA on those amounts. Setup before your plan's effective date is critical.

What Qualifies Under a Section 125 Plan

A basic POP (Premium Only Plan) covers:

Medical/health insurance premiums (employee's share)
Dental insurance premiums
Vision insurance premiums
Group term life insurance premiums (up to $50,000 face value)
Accident and disability insurance premiums

Enhanced Section 125 plans can also include FSA (Flexible Spending Account) contributions for healthcare expenses and dependent care expenses. FSA accounts are more complex to administer and require additional plan provisions.

How to Set One Up

For most Florida small businesses offering a group health plan:

Step 1: Finalize your group health plan selection and effective date
Step 2: We prepare or refer you to a plan document provider — cost: $200–$400 one-time
Step 3: Document is executed before the effective date
Step 4: Provide employees with a Summary Plan Description
Step 5: Notify your payroll processor to apply pre-tax treatment to premium deductions

For groups already on payroll platforms like Gusto, ADP, or Paychex, the payroll processor typically handles the pre-tax withholding setup once you provide the plan document. Annual administration is minimal.

Frequently Asked Questions

Can a sole proprietor or S-corp owner participate in a Section 125 plan?

No — and this is important for Florida small business owners. Sole proprietors, partners in a partnership, and 2%+ shareholders of S-corporations cannot participate in a Section 125 plan. They cannot make pre-tax premium contributions through a cafeteria plan. However, S-corp owners who are on W-2 payroll can deduct 100% of health insurance premiums above-the-line on their personal Form 1040 under IRC §162(l) — a different but equally valuable deduction. C-corp owners are not subject to this restriction and can participate in Section 125 plans.

Do I need a Section 125 plan if I pay 100% of employee premiums?

If you pay 100% of all employee and dependent premiums (employees contribute $0), a Section 125 plan provides no savings — there's nothing to make pre-tax because employees aren't contributing anything. However, if employees contribute toward dependent coverage or premium share-costs, even a small contribution makes the Section 125 setup worthwhile. Most Florida employers contribute 50–75% of employee-only premiums and allow employees to pay the remaining share — in those cases, a Section 125 plan is valuable from day one.

Set Up Section 125 Alongside Your Group Health Plan

We coordinate Section 125 plan setup as part of our group health enrollment service. Call (877) 224-8539 or use the form. Florida License #L088529.

Section 125 Cafeteria Plans for Florida Small Businesses